Charles R. Kennedy, CPA, MBA
Vice President & Director of Tax Services
Gifting assets is a common strategy employed by high-net worth individuals to transfer wealth, reduce taxable estates and provide financial support to loved ones. The process of gifting has significant tax implications for both the donor (the person giving the gift) and the recipient. This article will explore how gifting works, the current landscape of gift tax rules under the Tax Cuts and Jobs Act (TCJA), and the impending changes after the TCJA’s expiration in 2025. 
How Gifting Works: Donor and Recipient Tax Considerations
When an individual gifts an asset, several key tax considerations come into play:
Gift Tax Responsibility
The donor is typically responsible for paying any gift tax. However, the U.S. tax code provides a yearly exclusion amount ($18,000 per recipient in 2024 and $19,000 for 2025) and a lifetime exclusion amount ($13.61 million in 2024) that allows most gifts to be made tax-free. Gifts that exceed the annual exclusion reduce the lifetime exclusion, and only once the lifetime exclusion is exhausted does gift tax become payable.
Tax Basis of Gifted Assets
The tax basis of the gifted asset is crucial for the recipient. Generally, the donor’s basis in the asset, known as the “carryover basis,” Is passed on, or carried over, to the recipient. For example, if a donor purchased stock for $1 million and gifted it to a recipient when its value had appreciated to $5 million, the recipient’s basis in the stock would remain $1 million. If the recipient later sold the asset, they would owe capital gains tax on the $4 million gain, assuming the value had not changed.
There is a notable exception when gifting appreciated assets. If the asset’s fair market value at the time of the gift is lower than the donor’s basis, the recipient’s basis for determining a loss will be the fair market value at the time of the gift, while the donor’s basis will apply when calculating any gain.
Gift Reporting
Gifts that exceed the annual exclusion must be reported to the IRS using Form 709, which keeps track of the lifetime exclusion usage. However, no taxes are owed at the time of gifting unless the donor’s lifetime exclusion is surpassed.
Understanding these basics of gifting is essential for effective estate planning, particularly for high-net worth individuals looking to optimize the transfer of wealth.
As of 2024, the lifetime gift and estate tax exclusion stands at $13.61 million per individual, or $27.22 million for married couples. This high exclusion allows individuals to transfer substantial assets to heirs without incurring federal estate or gift taxes. For high-net worth individuals, this provides an opportunity to significantly reduce their taxable estates, ensuring that more wealth is passed on to the next generation.
Consider an individual with a business valued at $30 million. Under current law, the individual could gift $13.61 million worth of business interests to family members, using up their lifetime exclusion without triggering gift tax. This strategy effectively reduces the individual’s taxable estate, potentially saving millions in estate taxes.
In another scenario, a married couple with an estate worth $50 million could transfer $27.22 million to their children or grandchildren while still alive. By leveraging the current exclusion, they ensure that a large portion of their wealth is passed on without incurring gift taxes, thus reducing the estate tax burden upon their deaths.
Post-2025: The Reversion and Its Implications
The TCJA’s increased lifetime exclusion is set to expire on December 31, 2025. If no legislative changes are made, the exclusion will revert to pre-TCJA levels, projected to be around $6 million per individual or $12 million per married couple by 2026.
This reversion presents a significant challenge for high-net worth individuals. The reduced exclusion could result in higher tax liabilities for future transfers of wealth. For example, our business owner might face a scenario where any transfers exceeding $6 million after 2025 could incur gift taxes, substantially increasing the cost of wealth transfer and complicating estate planning.
For those planning to pass on businesses or other valuable assets, the post-2025 exclusion reduction could necessitate a revision of existing estate plans. Failing to take advantage of the current higher exclusion could lead to increased tax exposure and potential liquidity issues, particularly when dealing with illiquid assets like family-owned businesses.
Strategic Considerations
Given the impending changes, high-net worth individuals should act now to take full advantage of the current exclusion limits. Some strategies to consider include:
Utilizing Lifetime Exclusion Early
By making significant gifts before 2026, individuals can lock in the higher exclusion amounts, reducing the size of their taxable estates and minimizing future tax liabilities.
Grantor Retained Annuity Trusts (GRATs)
GRATs allow for the transfer of appreciating assets while retaining an annuity, effectively removing future appreciation from the estate. This strategy is particularly beneficial under current law and should be executed before the exclusion reverts.
Family Limited Partnerships (FLPs)
Family Limited Partnerships can manage and transfer family-owned businesses or investments. These partnerships often apply valuation discounts, further reducing the gift tax burden and optimizing the transfer process.
Conclusion
The upcoming expiration of the TCJA’s provisions marks a critical point for estate planning. High-net worth individuals must review and potentially adjust their gifting strategies to maximize the benefits of the current lifetime exclusion. By acting now, individuals can secure substantial tax savings, ensure efficient wealth transfer and provide financial stability for future generations before the 2025 deadline.
