Gifting Strategies to Reduce Your Taxable Estate in Retirement

Who Actually Pays Estate Tax?

The federal estate tax applies to the transfer of wealth at death — but only to estates above a very high threshold. In 2025, the federal estate tax exemption is $13.99 million per individual. A married couple together has an effective exemption of approximately $27.98 million using the "portability" rule, which allows a surviving spouse to inherit their deceased spouse's unused exemption.

The IRS estimates that fewer than 0.2% of estates owe any federal estate tax. If your estate is below these thresholds, the federal estate tax is not a concern — though state estate taxes (which some states impose at much lower thresholds) may still be relevant.

The 2025 Sunset: Why Now Is the Time to Plan

The current high exemption was created by the 2017 Tax Cuts and Jobs Act (TCJA). Unless Congress acts to extend it, the enhanced exemption sunsets after December 31, 2025 — reverting to the pre-TCJA level of approximately $7 million per person (indexed for inflation to approximately $7.5 million in 2026).

For individuals or couples with estates approaching or above $7–8 million, 2025 is a critical planning window. Gifts made now under the higher exemption are not "clawed back" even if the exemption drops later — but gifts made after the sunset would count against the lower $7 million limit. The IRS confirmed this anti-clawback protection in final regulations.

The Annual Gift Tax Exclusion: The Simplest Wealth Transfer Tool

Separate from the lifetime exemption, every person can give up to $19,000 per recipient per year in 2025 (indexed for inflation) without filing a gift tax return or reducing their lifetime exemption. This is the annual gift tax exclusion.

Married couples can combine their exclusions and give $38,000 per recipient annually — a strategy called "gift splitting." Applied systematically across many children and grandchildren, annual gifting can reduce a large estate by hundreds of thousands of dollars per year completely tax-free and without using any lifetime exemption.

• Gifts must be of a "present interest" — the recipient must have immediate access. Gifts to most trusts don't qualify unless they include a "Crummey power."
• The exclusion resets January 1 of each year — use it or lose it.
• Cash, securities, real estate, and other property all count toward the annual exclusion.

Two Categories That Are Fully Exempt — No Limits

Two categories of transfers are completely exempt from gift and estate tax, with no dollar cap and no impact on the annual or lifetime exclusions:

• Direct tuition payments: Payments made directly to a qualified educational institution for tuition (not room, board, or books) are excluded from gift tax in any amount. Write the check directly to the school — do not give it to the student.
• Direct medical payments: Payments made directly to a medical provider for someone's medical expenses are excluded from gift tax in any amount. Again, the payment must go directly to the institution or provider.

These exclusions are enormously powerful for grandparents helping with college tuition or funding a grandchild's medical care — in addition to the $19,000 annual exclusion, not instead of it.

529 Plan Superfunding

529 college savings plans offer a unique accelerated gifting option called "superfunding" or "5-year gift tax averaging." You can contribute up to 5 years of annual exclusion gifts at once — up to $95,000 per beneficiary in 2025 ($190,000 for a married couple) — and elect to spread the gift across 5 years for gift tax purposes.

The contribution counts against the annual exclusion for years 1 through 5, and no further annual exclusion gifts can be made to that beneficiary during the 5-year period (unless the account owner passes away, in which case the remaining years' worth of contributions are included in the estate). The funds grow tax-free and withdrawals for qualified educational expenses are tax-free.

The Step-Up in Basis: The Heir's Best Friend

One of the most important concepts in estate tax planning is the step-up in cost basis at death. When an heir inherits an asset, its cost basis is "stepped up" to the fair market value at the date of the owner's death — regardless of what the original owner paid.

This means that all unrealized capital gains accumulated during the owner's lifetime are permanently extinguished for income tax purposes. The heir can sell the inherited asset at its stepped-up basis and owe no capital gains tax on the pre-death appreciation.

The step-up in basis has a critical implication for wealth transfer decisions:

• Don't gift highly appreciated assets during your lifetime if you intend them for heirs. Gifts carry over your original basis — the recipient inherits your capital gains liability. Let the asset pass through your estate instead, where the step-up eliminates the gain.
• Give cash or high-basis assets as gifts during life — save the low-basis appreciated assets for your estate.
• For assets you do gift during life, gifting to lower-income family members who could sell in the 0% capital gains bracket is an exception where lifetime gifting can still make sense.

State Estate and Inheritance Taxes

Twelve states and the District of Columbia impose their own estate taxes, often at much lower exemption thresholds than the federal level. Massachusetts and Oregon, for example, have exemptions as low as $1 million. Six states impose inheritance taxes (taxing the recipient rather than the estate), with rates and exemptions varying by the heir's relationship to the deceased.

If you live in or hold significant real estate in one of these states, state-level estate planning deserves its own attention, separate from federal estate planning.