Why Making Your Gifts Before 2026 Make Sense

By: Randall A. Denha, J.D., LL.M.

The current exclusion amounts in 2024 are very generous.  On January 1, 2024, the amounts that individuals can gift free of federal gift and generation-skipping transfer (GST) tax rose to $13,610,000 for individuals and $27,220,000 for married couples due to inflation adjustments.  These generous levels of exemptions could be a once-in-a-lifetime opportunity to pass significant wealth to children, grandchildren, and more distant generations in a tax-efficient manner. Generosity doesn’t always come with a timetable, but if you have been thinking about when to make large gifts of cash or property to someone, now might be a good time.

It is important to note that the increased federal exemption amounts scheduled to expire on December 25, 2025, under the 2017 Tax Cuts and Jobs Act. Absent legislative changes, the exemptions will revert to $5,490,000 per taxpayer, indexed for inflation to approximately $6,500,000 to $7,000,000. As this is an election year, we will be monitoring the political landscape and continuing to advise our clients to consider making large gifts now to take advantage of the higher exemptions available.

The good news for those individuals using the current increased exemption amount prior to 2026 can be assured that the IRS will not ask for any gift amounts back that exceed the new federal exemption once it drops. The Internal Revenue Service has issued a directive making clear that gifts totaling no more than the higher exemption amount made prior to midnight on December 31, 2025, will not be subject to additional gift and estate taxes after the federal exemption is reduced in 2026.

Depressed valuations for certain assets have increased the likely effectiveness of lifetime gifts as well as of many other estate planning techniques. The window of opportunity presented by the elevated gift tax exclusion and GST tax exemption—and the currently available estate planning techniques—is limited. The exclusion and exemption amounts are scheduled to be cut in half by the end of 2025.  

For example, if you have a piece of real estate that has decreased in value now, due to the current crisis, you could gift it at the current value, with the expectation that the value will go back up in the future. That future appreciation would accrue to the benefit of your beneficiaries and would be free of gift tax and estate tax. Put another way, if you give now, and the assets appreciate, the appreciation won’t be subject to high gift and estate taxes. This makes giving now a wise move because you can gift more for less!

The Tax Cuts and Jobs Act of 2017 (TCJA) doubled the federal estate and gift tax exclusion amounts and the GST tax exemption. Inflation adjustments which went into effect on January 1, 2024, expanded these amounts even more.

• In 2024, individuals can transfer $13,610,000 free of estate, gift and GST tax during their lives or at death; married couples can transfer $27,220,000 during their lives or at death.

• Individuals who exhausted their gift tax exclusion amount and GST tax exemption prior to 2024 can gift an additional $690,000 in 2024 free of gift and GST tax. Similarly, married couples who previously exhausted their exclusion and exemption amounts can gift another $1,380,000 in 2024.

• The annual per donee gift tax exclusion amount also increased for 2024 to $18,000 per donee (or $36,000 per donee if spouses elect to split gifts). This amount is subject to indexing in future years. Gifts in any amount for tuition or medical expenses (including health insurance) paid directly to the educational institution, medical provider or insurance company continue to remain exempt from gift tax.

Suggested Wealth Transfer Ideas to Consider

Here are some planning techniques to consider while they are still available and while the exclusion and exemption amounts are at an all-time high:

• Topping off prior planning by making additional gifts to existing or new family trusts.
• Gifting residences or other assets to existing or new trusts that include spouses as discretionary beneficiaries, commonly referred to as spousal lifetime access trusts (SLATs).
• Funding grantor-retained annuity trusts (GRATs) to take advantage of current stock market volatility and depressed asset values.
• Selling assets to grantor trusts or, where appropriate, making cash gifts to facilitate the prepayment of existing loans from senior family members.
• Making new intrafamily loans.
• Allocating increased GST tax exemption to existing family trusts that are not exempt from GST tax.
• Securing the use of younger family members’ exclusion amounts and exemptions with gifting to family trusts for siblings and future descendants.

Additional detail on some of these popular techniques is provided below.

Dynasty (Generation-Skipping) Trusts

Through coordinated use of your federal gift exclusion and GST tax exemption, you may create trusts with an aggregate value of up to $13,610,000 ($27,220,000 per married couple) with no gift or GST tax. These trusts may benefit several generations of your descendants while insulating the assets from gift, estate and GST taxes. Transfer tax-protected multigeneration trusts are sometimes referred to as “dynasty trusts.”

The creator of a dynasty trust allocates GST tax exemption to the trust and funds it with assets likely to appreciate. Those assets and all post-funding income and appreciation are removed from the taxable estate of the creator of the trust and would not be included in the estate of his or her children and grandchildren, allowing the trust to grow free of transfer taxes for multiple generations. In addition to mitigating the impact of transfer taxes, a dynasty trust can help shield a family’s assets from creditors, claims in the event of divorce and poor decisions of future beneficiaries. If structured correctly, in most cases, the trust income can be protected from state income tax.

Spousal Lifetime Access Trusts (SLATs)

Trusts, including dynasty trusts, may be structured to give your spouse, as well as your children and more remote descendants, access to the trust as discretionary beneficiaries. SLATs appeal to individuals who want the comfort of knowing that transferred wealth could still be available for family needs through distributions to the spouse. The trust assets can serve as a “rainy day fund” while allowing the grantor to take maximum advantage of the current levels of exclusion and exemption.

Grantor-Retained Annuity Trusts (GRATs)

Grantor-retained annuity trusts are a popular technique that you can use to transfer a portion of the appreciation on your assets to family members without the imposition of any gift or estate tax (assuming you survive the initial term, which can be as short as two years). GRATs are particularly useful in a time of extreme market turbulence. Turbulence creates an opportunity to fund a GRAT when there is a downswing in values that is expected to be temporary. GRATs are also particularly attractive gifting vehicles for hard-to-value assets.

The grantor of a GRAT transfers assets to a trust while retaining the right to receive a fixed annuity for a specified term. The retained annuity is paid with any cash on hand, or if there is no cash, with in-kind distributions of assets held in the trust. At the end of the term, the remaining trust assets pass to the ultimate beneficiaries of the GRAT (for example, a trust for the benefit of the grantor’s spouse and children), free of any estate or gift tax.

Younger Generation Planning

The younger members of wealthy families have exclusions and exemptions that are likely to be cut back before they establish trusts for their future children. If they are adults, they should consider using their exclusions and exemptions by creating trusts for the benefit of their unborn descendants and other family members. Senior generations can also be included as discretionary beneficiaries if warranted.

If a young family member lacks funds to use to make gifts, the trustees of non-GST tax-protected trusts held for their benefit could consider making distributions to them to enable them to make gifts before 2026. The assets in such non-GST tax exempt trusts would be subject to GST tax if the assets remain in the trust when the younger family member dies, so distributing property from such trust does not forego a preserved tax benefit.

Income Tax Considerations

GRATs and SLATs enjoy an income tax advantage that further enhances their appeal. GRATs and SLATs are both grantor trusts. Dynasty trusts can also be structured to be grantor trusts. When a trust is a grantor trust, its assets are treated as owned by the grantor and the grantor must pick up all items of income, credit and deduction attributable to the trust on the grantor’s personal income tax return. Because the trust’s grantor pays income tax on all trust income, the trust property will be able to grow free of income tax. Under current law, the payment by the grantor of the income tax on income earned by his or her grantor trust is not considered a taxable gift.

Because the grantor of a grantor trust is treated as owning the trust’s assets, transactions between the trust and its grantor are ignored for income tax purposes. This permits the grantor to exchange assets owned by the grantor with assets of equal value owned by the trust. Exchanges can be a very valuable technique for income tax basis planning. If, for example, a grantor trust owns an asset worth $10 million with a tax basis of $5 million, the grantor could acquire that asset from the trust for a cash payment of $10 million. No tax would be imposed on the sale. If the grantor retains that asset until death, the asset will receive a new tax basis equal to its value on the date of the grantor’s death.

The grantor can rent an asset that he or she transferred to a grantor trust, provided that the rent is a fair market rent. Paying rent enhances the effectiveness of the gift because the rent will shift additional wealth out of the estate.

Intrafamily Loans

The IRS publishes interest rate tables each month that establish the lowest rate that, if properly documented, can be safely used by you for loans to family members without producing taxable gifts. The growth rate of your funds that are lent to children, or to trusts for their benefit, will be limited to that interest rate. Those funds, in turn, can be used by the junior family members to be invested in a manner that hopefully will achieve a rate of return in excess of the interest rate charged on the loans.

Making a loan to a trust for your children may be even more advantageous than making a loan outright if the borrowing trust is a grantor trust for income tax purposes. Ordinarily, the interest payments on a note must be included in the taxable income of the lender, but if the payments are made by a grantor trust, they will be free of income tax, because it is considered a payment from the grantor to himself or herself for income tax purposes.

In January 2024, the applicable federal rate for mid-term loans (between three- and nine-year terms) is 4.37%, and the applicable federal rate for long-term loans (over nine years) is 4.54%.

Alternatively, it may be more advantageous for senior family members to put some of their expanded federal gift exclusions and GST tax exemptions to work by making cash gifts to facilitate the prepayment of existing loans to family members and to trusts established for the benefit of family members.

Sales to Grantor Trusts

A sale to a grantor trust for cash or a note can be an extremely effective planning strategy. In the case of a sale of a minority interest in an entity or a fractional interest in real property, valuation discounts can apply to limit the amount of purchase price necessary to avoid a taxable gift. As is the case with gifts, the income and appreciation generated by the sold property after the sale will be protected from future estate taxes. If you don’t already have a grantor trust in existence, consider using your current gift tax exclusion to create one.

A grantor trust provides you with two independent planning opportunities. First, as discussed above, you will pay the income tax on the income generated by the trust, including tax on capital gains, thereby allowing the trust to grow tax-free while reducing your future estate taxes. In addition, you may engage in transactions with your grantor trust without any income tax consequences.

If you have previously exhausted your exclusion and exemption amounts through prior gifting to grantor trusts, you may want to leverage the value of your prior gifts through new sales to grantor trusts or, where appropriate, by making cash gifts to facilitate the prepayment of existing installment obligations owed to you by your grantor trusts from prior sales.

What If I Gift Now and the Exemption Drops?

The best news is that if you choose to make large gifts to take advantage of the favorable gift exemptions before they expire, you are “locked” in. If the exemption changes to a lower amount in the future, the reduced exemption amounts won’t be retroactive. Gifts made using today’s record-high exemptions are protected from future tax when the exemption amounts are reduced. The IRS has clearly said there will be no “claw-back.” Your pre-2026 gifts will be grandfathered in and will not be subject to additional estate tax.