Gifting Strategies to Reduce Your Taxable Estate in Retirement

The federal estate tax exemption is $15 million per person in 2026, or $30 million for a married couple using portability. The scheduled sunset that would have cut the exemption roughly in half was repealed before it took effect, so the planning urgency that dominated advice written through mid-2025 no longer applies to most families.

Who actually pays federal estate tax?

The federal estate tax applies to the transfer of wealth at death — but only to estates above a very high threshold. In 2026, the federal estate tax exemption is $15 million per individual. A married couple together has an effective exemption of $30 million using the "portability" rule, which allows a surviving spouse to inherit their deceased spouse's unused exemption.

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. Note that portability is not automatic: the surviving spouse must claim it by filing Form 706 for the first spouse's estate, even when no tax is owed.

Did the estate tax exemption sunset in 2026?

No. The exemption created by the 2017 Tax Cuts and Jobs Act was scheduled to expire after December 31, 2025 and revert to roughly $7 million per person. That sunset was repealed before it took effect. Instead of falling, the exemption rose to $15 million per person for 2026, up from $13.99 million in 2025, and it remains indexed for inflation in future years.

This matters because a great deal of estate planning content — and a great deal of advice given in 2024 and 2025 — was built around a deadline that no longer exists. If you were told you had to complete large gifts before the end of 2025 to lock in a disappearing exemption, that specific urgency is gone. Strategies executed for other reasons, such as removing future appreciation from your estate or funding trusts for family reasons, are unaffected.

How much can you give away tax-free each year?

Separate from the lifetime exemption, every person can give up to $19,000 per recipient per year in 2026 without filing a gift tax return or reducing their lifetime exemption. This is the annual gift tax exclusion, and it is indexed for inflation.

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.

What gifts are completely exempt from gift tax?

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.

How does 529 superfunding work?

529 college savings plans offer an 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 2026 ($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.

What is the step-up in basis at death?

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.

Which states have their own estate or inheritance tax?

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, which tax the recipient rather than the estate, with rates and exemptions varying by the heir's relationship to the deceased.

This is the part of estate planning that still catches families off guard. With the federal exemption at $15 million, a household worth $3 million has no federal exposure at all — but in Massachusetts or Oregon that same estate is squarely in range of a state estate tax. If you live in or hold significant real estate in one of these states, state-level planning deserves its own attention, separate from federal planning.

Estate decisions rarely stand alone. Converting pre-tax accounts can shrink what your heirs inherit as taxable income — see Roth conversions as an estate planning tool — and the bracket mechanics that govern lifetime gifting decisions are covered separately. For the wider picture, see our tax planning hub.