With major changes in tax law over the last few years - and an upcoming potential reduction in the gift and estate tax exemption - year-end gifting has become an essential tool for safeguarding your wealth and reducing estate taxes. By acting proactively and strategically now, you could literally save your heirs millions of dollars and ensure that your legacy is protected from unnecessary tax hits.
In this post, I’ll dive into the key charitable giving strategies you can use before year-end to maximize these benefits and seize these fleeting opportunities while they’re still here.
Proactive Planning Amid Law Changes
Before we dive into the specific strategies, it’s crucial to understand why proactive planning matters, especially now. Every time you transfer wealth - whether through gifts during your lifetime or through your estate after death - there’s a transfer tax involved. These transfers are taxed differently, but they both use up a shared exemption.
Right now, the unified gift and estate tax exemption is set at $13.61 million per person (double for married couples), and it also covers the generation-skipping transfer tax for gifts to "skip persons," such as grandchildren. In 2025, the exemption increases slightly to $13.99 million, but in 2026, it’s set to be cut in half, dropping to around $6.5 to $7 million per person under the Tax Cuts and Jobs Act (TCJA) sunset provision.
This creates a limited window for substantial tax-free wealth transfers and waiting until after 2025 means risking the chance to maximize this "use it or lose it" exemption. Doing nothing could cost you millions in avoidable taxes - too high of a price to pay for inaction.
Let’s look at two scenarios. In the first, you do nothing. When the exemption drops to $6-7 million in 2026, you lose the chance to transfer $7 million tax-free, potentially leading to $2.8 million (40% x $7M) in federal estate taxes.
In the second scenario, you transfer $7 million now, before the TCJA expires, and hope it’s extended. If luck is on your side and the TCJA is extended, you’ll have $7.61 million unused exemption remaining, adjusted for inflation. But if the TCJA sunsets and the lifetime gift exemption is reduced, that unused portion will be lost and no new exemption amount will be provided.
By letting this $7.61 million unused exemption disappear, you could expose yourself to millions in federal estate taxes, depending on how much wealth you plan to transfer in the future.
In other words, it comes down to choosing between a bird in the hand or two in the bush. And that’s why proactive planning now is crucial.
Increased IRS Scrutiny
Another reason to act now is that the IRS is stepping up its focus on high-net-worth individuals and complex financial structures, especially partnerships and entities with large assets. They’re using AI and machine learning to track down inconsistencies or questionable transactions. That means keeping your financial and estate planning up-to-date and well-documented is more important than ever.
This is where valuation discounts - like those used to reduce the taxable value of assets transferred through trusts - may come under more scrutiny. Working closely with your financial advisor, tax professionals, and estate planner ensures everything is correctly reported and compliant.
Proper documentation, including gift tax returns, is essential to avoid complications during an audit.
Balancing Estate & Income Taxes
Even if you don’t have a huge estate, balancing estate and income taxes is critical when planning your gifts. Assets transferred during your lifetime to your loved ones or a trust are given a carryover basis, meaning the recipient gets your original purchase price as the basis. When they sell, this could trigger significant capital gains taxes. In contrast, assets passed on at death receive a step-up in basis, meaning the beneficiaries inherit the asset at its current market value, potentially avoiding capital gains taxes.
You need to weigh the benefits of reducing your taxable estate through lifetime gifts against the potential for higher capital gains taxes later. Capital gains taxes are usually lower than estate taxes but are taxed from the first dollar of gain. On the other hand, estate tax is currently ranges from 18% to 40%, but only triggered after exceeding the exemption amount.
Here’s a strategy to help manage this: if you transfer an asset during your lifetime and later realize it has appreciated significantly, a substitution power within a trust allows you to swap it for another asset of equal value. This helps you avoid losing the step-up in basis while keeping flexibility in managing taxable gains.
As you can see, it's crucial to structure trusts with built-in flexibility so adjustments can be made as circumstances change. This ensures you're not locked into decisions that may no longer make sense in the future.
State Estate Taxes and Portability
Even though the federal exemption is high, many states have their own estate taxes with much lower exemption limits. Unlike the federal level, where portability allows a surviving spouse to use the deceased spouse’s unused exemption, most states don’t offer this. This is why electing portability at the federal level can be crucial - especially if you want to ensure both spouses’ exemptions are fully used.
In blended families or second marriages, setting up bypass or credit shelter trusts can prevent unintentional disinheritance and still reduce estate tax liability.
Residency Considerations
If you’re a snowbird splitting time between states, residency issues can complicate estate planning. For example, you might claim Florida residency to avoid state income taxes, but another state could argue you’re still domiciled there. It’s essential to establish clear proof of your intended residency, including where you vote, hold your driver’s license, and maintain significant assets.
For instance, in Illinois, while there is no gift tax, a "three-year rule" exists that can pull gifts made within three years of death back into the estate for state tax purposes. Without proper documentation and planning, this could result in paying estate tax in Illinois without receiving credit at the federal level.
Strategies for Year-End Charitable Giving
When it comes to making lifetime transfers before the year ends, you have several options:
Outright Gifts
Annual exclusion gifting is an easy way to reduce your taxable estate without having to file a gift tax return. But the key is to act before the year ends. For 2024, you can give up to $18,000 per person tax-free. Just make sure the gift is completed before December 31st.
The recipient must actually receive and take possession of the gift by year-end - whether that’s retitling property or cashing a check.
If you’re making more complex gifts, like gifting business interests using valuation discounts, make sure to report them to start the IRS statute of limitations. That way, the IRS only has three years to challenge the gift.
529 Plans
One effective strategy for year-end gifting that I like is called “front-loading a 529 plan”. The IRS allows a contributor to make up to five years' worth of annual gift tax exclusions in a single upfront contribution, enabling substantial gifting without affecting the lifetime exemption. For example, in 2024 you can transfer $90,000 out of your estate to your child’s or grandchild’s 529 plan.
If you want to amplify your giving, you could contribute $18,000 at the end of December and “superfund” in January, effectively covering six years of gifting within a short timeframe.
Keep in mind that if the contributor passes away within five years, any unused portion of the gift could revert to the taxable estate.
Crummey Trusts
A Crummey trust is a popular estate planning tool that enables individuals and families to transfer wealth to future generations in a tax-efficient way. The defining feature of a Crummey Trust is that beneficiaries must have a brief window - typically 30 to 60 days - to withdraw the gifted amount for it to qualify for the annual gift tax exclusion.
When gifting partnership interests in family-owned businesses or making similar contributions to a Crummey Trust with multiple beneficiaries, timely notification is essential.
Beneficiaries should be notified in advance so they have enough time to decide whether to exercise this withdrawal right. If the Crummey notice isn’t sent on time, you could lose the annual gift tax exclusion for that year
Also, be sure to keep detailed records to protect against any IRS challenges.
Irrevocable Life Insurance Trusts
A similar process applies to Life Insurance Trusts (ILITs), where grantors make contributions to cover premium payments. However, waiting until the last minute to fund the trust can backfire, as the annual gift exclusion may not apply if the Crummey withdrawal period doesn’t expire before the year’s end. To avoid issues with the IRS, I will repeat myself - it’s essential to send Crummey notices early and maintain records of the notification dates.
Intentionally Defective Grantor Trust
For larger estates, an Intentionally Defective Grantor Trust (IDGT) is a powerful tool for transferring wealth. The term “defective” in the name often raises concern, with people fearing they might be doing something improper. In reality, there's nothing wrong or illegal about using this strategy because IDGTs are a type of Grantor Trust governed by rules in Sections 671 through 678 of the tax code.
The “defect” is intentional and has more to do with the way the trust is treated for tax purposes. For estate tax purposes, the transfer to the trust is considered complete, meaning the assets are removed from the grantor's taxable estate. However, for income tax purposes, the trust’s income is attributed to the grantor who pays income tax instead of the trust. This can actually be a strategic advantage known as “tax burn”. By paying taxes on the trust’s income, the grantor effectively reduces their taxable estate while allowing the trust assets to grow for future generations.
Along with the tax burn, an IDGT can further maximize its benefits with the “freeze and squeeze” strategies.
The freeze strategy involves transferring assets out of the estate at their current value, effectively “freezing” their value for estate tax purposes. Any future appreciation on the asset then escapes estate taxation and instead benefits the heirs, But keep in mind the transferred asset won’t qualify for a step-up in basis for capital gains since the carryover basis applies.
The squeeze strategy further reduces the asset’s current value by applying discounts and other valuation techniques, such as for lack of marketability or control, which lowers the amount subject to estate or gift taxes.
Transfers to IDGTs are particularly effective in low-interest environments but even during high-interest-rate periods combining tax burn, freeze, and squeeze strategies can effectively shrink your taxable estate, maximize the value passed to beneficiaries, and reduce overall tax liabilities.
SLATs for Married Couples
Another variation of the IDGT is the Spousal Lifetime Access Trust (SLAT), where the grantor’s spouse is a beneficiary. By transferring assets to a SLAT, the donor spouse can remove these assets from their taxable estate, potentially reducing estate taxes but at the same time continue indirectly using the asset despite it in being in the trust.
Charitable Remainder Trusts
In today’s higher-interest-rate environment, a Charitable Remainder Trust (CRT) can be an effective tool for charitable giving. A CRT is a split-interest trust that allows you to transfer assets into the trust, receive income for a specified period, and then direct the remaining assets to a charity. Higher interest rates increase the value of this remainder portion, potentially enhancing your income tax deduction and reducing estate tax exposure. In essence, the higher the rates, the greater the potential benefit for both your income tax and estate planning objectives.
Final Thoughts
To wrap it all up: the window for taking advantage of today’s high exemption may potential close if the Tax Cuts and Jobs Act sunsets in 2025, if you wait, you may face millions in unnecessary estate taxes. Whether through outright gifts, trust strategies, or advanced techniques like IDGTs and SLATs, the time to act is now. With the IRS increasing scrutiny and interest rates fluctuating, it’s essential to make well-documented, thoughtful decisions before the year ends.
Make sure to work with your financial advisor, estate planner, and tax professional to get your gifting strategy in place before December 31st. The sooner you act, the better positioned you’ll be to pass on wealth tax-efficiently to your loved ones and causes you care about.
If you're looking for guidance on estate planning or exploring tax-efficient wealth transfer strategies, feel free to schedule a complimentary Estate Clarity meeting - I’ll leave the link in the description below.
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