Tax legislation signed in 2025 made the historically high federal gift and estate tax exemption permanent (lifetime limits of $15 million for individuals and $30 million for married couples for 2026). This means most people don’t have to worry about their assets being subject to estate tax when they die. But there may be good reasons to make lifetime gifts to family members.
Taxable and Nontaxable
In general, a program of regular tax-free gifts reduces the size of your estate and shields your wealth against potential estate tax liability should it exceed the exemption amount. In 2026, you can make annual gifts of $19,000 ($38,000 for married couples) per recipient — as well as an unlimited additional amount of direct payments of tuition or medical expenses on another person’s behalf. Taxable gifts — or gifts over the annual exclusion amount — can also potentially reduce your estate tax liability by removing future appreciation from your estate.
However, when contemplating lifetime gifts, you should also consider the income tax implications. Currently, assets transferred at death receive a “stepped-up basis,” meaning that their tax basis increases or decreases to their fair market value amounts on the date of death. This allows heirs to sell inherited assets without triggering capital gains taxes. Assets transferred as a gift during life, on the other hand, retain your tax basis, so recipients could end up with a large income tax bill should they sell them.
When It Makes Sense
Fortunately, if you want to make gifts to family members while you’re still alive, there’s a tax-smart way to do it. For the most part, you’ll want to hold on to highly appreciated assets that will benefit from the step-up in basis later — especially if your heirs are in one of the upper income tax brackets.
But if you own some highly appreciated assets you want to divest yourself of now and your heirs are in lower tax brackets, gifting those assets to them might save income tax. That’s because your heirs can sell them at a lower tax cost — possibly even $0 in the case of young adult children with no or minimal income.
Beyond Taxes
Even if gift-giving offers no tax advantages, there are nontax benefits to making lifetime gifts. For example, you can witness your children or grandchildren enjoying the fruits of your labor, help loved ones pay for education or medical expenses, or transfer business interests to the next generation.
By spreading out distributions over time from a controlled vehicle, trusts can help prevent your children or other heirs from squandering assets. Also, they can provide incentives for desired behaviors. For example, a beneficiary may be required to graduate from college or remain gainfully employed to fully benefit from the trust. Trusts can also serve as a safety net by making assets available to your loved ones in times of true financial need.
Plenty of Reasons
Whether you expect your estate to weigh in above the estate tax exemption amount or just want to be around to see family members enjoy the bounty, there are plenty of reasons to make lifetime gifts. Contact your financial or estate planning advisor to discuss possible options.
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