Tax Benefits of Gifts
Annual Exclusion Gifts
As covered earlier in this guide, for 2025 a donor can make annual exclusion gifts of up to $19,000 per donor, per donee, per year. For the donor, these gifts are totally exempt from estate and gift taxes, as well as all future income and appreciation on the property given (the gift recipient is responsible for post-gift taxes on income and appreciation). A $19,000 gift may not sound that impressive, but with multiple beneficiaries and multiple years, the estate reduction for the donor could be significant.
Example - Annual Exclusion on Gifts - Bob and Millie have two children and two grandchildren. They make maximum annual exclusion gifts for 15 years. Assume for this example that the annual exclusion was $15,000 and was not increased by inflation during this period. During that time, the gifted property appreciates 5% per year. The results are impressive:
| Annual Exclusion | $15,000 |
| Donors (2) x Donees (4) x Years (15) | x 120 |
| $1,800,000 | |
| 5% compounded growth over 15 years* | $789,428 |
| Value in hands of donees (and out of donor's estate) | $2,589,428 |
| The estate reduction is accomplished without any reduction in Bob and Millie's unified credit. They still can give away $13.99 million more each during their lifetimes (based on 2025 estate tax exclusion). *Assumes gifts made at end of each year and does not account for any income tax paid on the earnings. |
Lifetime Exclusion Gifts (Unified Credit Gifts)
A client may wish to make gifts beyond the annual exclusion. If so, the client begins using up their unified credit. Using up a part or all of the unified credit means that the portion so used will not be available to reduce estate tax. So, lifetime exclusion gifts do not have a current tax cost, but they will have a future tax cost if the value of the individual’s estate at death exceeds the exclusion amount for the year of death.
Nevertheless, clients may still desire to make lifetime exclusion gifts because all of the future income and appreciation on the gifted property will not be included in their estate. Thus, they use up their lifetime exclusion at today’s values rather than the values at date of death.
Gifts Beyond Lifetime Exclusion
A client may wish to make gifts beyond the annual and lifetime exclusions. These gifts are subject to current year gift tax. Even clients who can afford to part with the property may be reluctant to do anything that accelerates payment of transfer (gift or estate) taxes. However, it might be to their advantage to do so.
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First, all of the income and appreciation on the gifted property escapes the donor’s estate taxes.
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Second, gift and estate taxes are computed differently., With estate taxes, the tax is computed on the gross estate, before payment of estate tax., Thus, in effect, a tax is paid on the tax.
With gift taxes, the tax is computed only on the amount the donee receives. So, the gift tax is really a lower tax.