The federal gift and estate tax system allows individuals to transfer wealth during their lifetime or at death, subject to certain exemptions and limitations. One of the most widely used tools for tax-efficient wealth transfer is the annual gift tax exclusion. For 2025, the annual gift exclusion allows individuals to gift up to $19,000 per recipient without incurring any gift tax or using their lifetime estate and gift tax exemption.

This exclusion means that a donor can give $19,000 to as many individuals as desired each year. A married couple can combine their exclusions and gift $38,000 per recipient annually without triggering the need to file a gift tax return. These gifts are not taxable and do not reduce the donor’s lifetime exemption.

However, when a gift to a single recipient exceeds the annual exclusion, the excess amount is considered a taxable gift. While this does not necessarily result in a tax liability, it does require the donor to file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. The excess amount applies against the donor’s lifetime federal gift and estate tax exemption, which is $13.99 million in 2025 per individual (or $27.98 million per couple & it is portable to the second spouse at the death of the first spouse).

Example:

If an individual gives $50,000 to a child in 2025, $19,000 is covered by the annual exclusion. The remaining $31,000 is a taxable gift. The donor must file Form 709 to report the gift, and that $31,000 reduces their remaining lifetime exemption. No immediate tax is owed unless the donor has already exhausted their lifetime exemption.

Sarah is another example:

• Age: 58
• Occupation: Retired executive
• Net Worth: $20 million
• Estate Planning Goal: Transfer wealth to her children while minimizing estate and gift taxes.

Estate Planning Strategy

In 2025, Sarah decides to contribute $100,000 to an irrevocable trust for the benefit of her 16-year-old son, Jason. The trust is structured as a Crummey trust, meaning it gives Jason a temporary right to withdraw contributions—qualifying part of the gift for the annual gift exclusion.

Step-by-Step Breakdown:

1. Annual Gift Exclusion Applied:
   • Sarah uses her 2025 annual exclusion of $19,000 in 2025 to offset part of the $100,000 gift.
   • Jason is notified of his temporary withdrawal right, satisfying the Crummey provision.
   • $19,000 is considered a non-taxable gift.
2. Excess Gift:
   • The remaining $81,000 ($100,000 - $19,000) is a taxable gift.
   • Sarah must file IRS Form 709 to report this excess amount.
3. Use of Lifetime Exemption:
   • Sarah’s $81,000 taxable gift will reduce her federal lifetime estate and gift tax exemption, which is $13.99 million in 2025.
   • After this gift, her remaining exemption is $13,909,000.
4. Trust Structure:
   • The irrevocable trust includes terms that delay distributions to Jason until age 30, with discretionary access for health, education, maintenance, and support (HEMS) before that.
   • The assets grow outside of Sarah’s estate, leveraging estate freeze techniques.
5. Tax and Reporting Implications:
   • No gift tax is due now, because Sarah has not exhausted her lifetime exemption.
   • Filing Form 709 ensures compliance and starts the 3-year statute of limitations for IRS audit of the gift.
   • If the trust assets appreciate, future growth escapes estate taxation.

Why It Works for Sarah:

By combining the annual exclusion with a strategic excess gift, Sarah efficiently moves wealth to her son’s trust, reduces her future taxable estate, and preserves family wealth. This strategy can be repeated annually and scaled up for other beneficiaries or additional trusts.

The use of the lifetime exemption is significant for estate planning. Every dollar used for gifts over the annual exclusion reduces the amount available to shield the donor’s estate from federal estate tax at death. Once the exemption is fully used, additional taxable gifts or estate value are taxed at a federal rate of up to 40%.

Filing Form 709 also starts the statute of limitations on IRS review of the gift. Without filing, the IRS could challenge the gift indefinitely. Accurate and timely filing is crucial to preserve audit protection and maintain clear records of exemption use.

Additionally, gifts of certain assets—like real estate or closely held business interests—may require appraisals to substantiate fair market value on Form 709. Improper valuation could lead to unintended tax consequences.

Planning Considerations:

• Use the annual exclusion to make tax-free gifts each year and reduce your taxable estate.
• For gifts above the exclusion, consult with an estate planning professional to strategize exemption use.
• Consider "gift splitting" with a spouse to double the annual exclusion amount per recipient.
• File Form 709 accurately and timely for all gifts exceeding the annual exclusion.
• The concept known as "gift splitting," allows the spouse who desires to make a tax-free gift (the "donor" spouse) to utilize the non-donor spouse's annual gift exclusion or lifetime unified gift and estate tax exemption (lifetime exemption). While this may appear relatively straightforward, it is critical that both spouses understand the rules related to gift splitting to protect against unintended consequences that could be costly in the long run. To consent to split gifts, the donor must complete and file a federal gift tax return (Form 709), which the non-donor spouse must also sign, providing their consent to split gifts for the calendar year applicable to the gift tax return.

In summary, the annual gift exclusion provides a simple and effective way to transfer wealth tax-free. When larger gifts are made, understanding the implications on the lifetime exemption and ensuring proper gift tax return filing are essential to avoid pitfalls and optimize long-term estate planning.

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For Informational Purposes only and not for legal or tax advice.

About the Author – Marie Feindt, JD 

Marie Feindt is the Planning Specialist – Estate Attorney at Members’ Wealth, a boutique wealth management firm that offers a comprehensive and holistic approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of estate planning experience, Marie and the Members’ Wealth team thrive on bringing clarity and confidence to clients’ unique situations. She believes everyone, young adults and older, need the essential documents to conserve and preserve and transfer assets accumulated during lifetime to the next generation.

Marie received her JD from Widener University School of Law, her bachelor’s degree from Penn State University, University Park and is currently enrolled in the Villanova University Charles Widger School of Law Graduate Tax Program.

Marie is an Adjunct Faculty at the Villanova University College of Professional Studies Paralegal Professional Certificate Program where she teaches Estates & Trusts and Civil Procedure & Litigation and Torts & Personal Injury Law.

Marie volunteers for a monthly legal clinic at The Salvation Army in Chester, PA facilitated by the Christian Legal Clinic of Philadelphia. She has served on the Women’s Commission of Delaware County and as a Board Member for the Delaware County Literacy Council.

Marie enjoys biking, reading, yoga and walking in her free time with her husband and three children.

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