Estate Planning and Administration Toolkit: The Annual Exclusion
As estate planning professionals, we frequently counsel our clients on the importance of tax-efficient strategies to preserve wealth for future generations. One key tool in minimizing the impact of gift taxes and reducing the taxable value of an estate is the annual gift tax exclusion.
What is the Annual Gift Tax Exclusion?
The annual gift tax exclusion allows individuals to gift a certain amount of money or assets to another person without triggering any gift tax liability or reducing an individual’s lifetime gift tax exemption. This exclusion provides a way to transfer wealth tax-free, so long as the gift amount does not exceed the annual exclusion limit.
In 2025, the annual exclusion limit is $19,000 per recipient from individual donors. This means an individual can gift up to $19,000 per person without any tax consequences or the need to file a gift tax return (Form 709) with the IRS. Importantly, this exclusion applies to each recipient individually. If you have multiple beneficiaries, you can gift $19,000 to each one in a given year without reporting the gift to the IRS or reducing your lifetime gift tax exemption.
For married couples, the annual exclusion allows for even higher gifting capacity due to a concept called gift splitting. If both spouses agree to gift jointly, they can combine their exclusions to effectively double the amount that can be gifted tax-free in a year. Provided both spouses agree to split the gift in 2025, the annual exclusion limit is $38,000 per recipient from married donors.
Key Points to Remember About the Annual Exclusion
Understanding how to maximize the benefits of the annual exclusion can be crucial for estate planning. Here are four key considerations to keep in mind when utilizing this tool effectively:
1. Cash or Property: The exclusion applies to both cash and property. It includes not just financial gifts but also the transfer of real estate, stocks, or other assets. You can make a gift outright to the intended beneficiary or gift to a trust for the benefit of the intended beneficiary.
2. Gift Tax Returns: If a gift exceeds the annual exclusion amount ($19,000/individual and $38,000/married couple), or if spouses agree to gift splitting, the donor must file a gift tax return (Form 709). However, this does not automatically result in tax liability. Any gift in excess of the annual exclusion is deducted from the donor’s lifetime gift and estate tax exemption, which, for 2025, is $13.99 million.
3. Reducing Estate Tax Liability: By regularly gifting up to the annual exclusion amount, clients can effectively reduce the size of their estates over time. Consistent gifting can be an effective, long-term strategy to minimize future tax consequences following your death.
4. Educational and Medical Expenses: In some circumstances, payments towards a beneficiary’s educational and medical expenses may not count towards an individual’s annual exclusion. These payments must be made directly to a school or medical provider to be exempt from the annual exclusion.
By strategically using the annual exclusion, individuals and families can preserve wealth and minimize future tax burdens.
If you are considering utilizing the annual gift tax exclusion or have questions about this article, you can call 215.661.0400, email Danielle Yacono, Esquire directly, or connect with a Hamburg, Rubin, Mullin, Maxwell & Lupin Estate Planning Team Member to discuss how we can assist you in preserving your wealth for future generations.