Year End Gifting Strategies in the Age of the High Estate Tax Exemption
As the year-end approaches, the adage says that it is better to give than to receive. We agree. The implementation of year-end gifting strategies can be an important component to a family’s overall estate planning.
High–net–worth families facing year‑end have a narrow but powerful window to shift substantial wealth out of the taxable estate while also optimizing income tax and charitable planning. Thoughtful use of the annual exclusion, “use‑it‑or‑lose‑it” lifetime exemption, and charitable contribution rules can materially reduce transfer and income taxes while advancing family and philanthropic goals.
Annual Exclusion And “Check Must Clear” Timing
For 2025, each donor may give up to 19,000 per donee as a tax‑free “annual exclusion” gift under Internal Revenue Code (IRC) section 2503(b), without using any lifetime exemption or incurring gift tax. Married couples may “split” gifts, effectively doubling this amount per recipient if they comply with the gift‑splitting rules and file Form 709 where required.
To qualify as a gift “made” within the calendar year, checks must generally be delivered and cashed (or otherwise paid) before year‑end so that the donor has fully parted with dominion and control. See Treas. Reg. § 25.2511‑2(b)–(c) (completed gifts) and gift‑timing cases analyzing when checks and promissory notes constitute completed transfers. This timing is particularly important for large families where multiple annual‑exclusion checks are written in late December; counsel should ensure funds are deposited and collected before December 31 to avoid shifting the gift into the next tax year.
Present‑Interest Requirements and Crummey Powers
The annual exclusion is available only for “present interests” in property, not future interests, as defined in IRC § 2503(b) and Treas. Reg. § 25.2503‑3. When gifts are made in trust (for example, to consolidate management or provide asset protection), Crummey withdrawal powers are commonly used to convert what would otherwise be a future interest into a present interest by giving beneficiaries a limited right to withdraw each contribution. Courts and the IRS have emphasized that beneficiaries must have a real economic stake in the trust for these powers to qualify, and so-called “naked” Crummey powers—where a beneficiary has only a nominal withdrawal right and no other meaningful interest—have been challenged. For families over 30 million in net worth, careful drafting and administration of Crummey notices is essential to preserve multiple annual exclusions each year.
Direct Tuition and Medical Payments Under IRC § 2503(e)
In addition to annual exclusion gifts, direct payment of tuition and medical expenses is completely excluded from gift tax under IRC § 2503(e), without using either annual exclusion or lifetime exemption. To qualify, payments must be made directly to the educational institution for tuition or directly to the provider of medical care for qualifying medical expenses, consistent with Treas. Reg. § 25.2503‑6. Year‑end planning for wealthy families often includes prepaying spring semester tuition or anticipated medical procedures by December 31, thereby moving additional value out of the taxable estate without any gift‑tax impact.
Charitable Gifting and Percentage‑Of‑AGI Limits
Substantial year‑end charitable giving can reduce current‑year income tax, particularly in years with large liquidity events or Roth conversions. IRC § 170 generally limits the charitable deduction for individuals to a percentage of adjusted gross income (AGI), with 60% of AGI for cash gifts to most public charities, 30% for appreciated capital gain property to public charities, and 20% for gifts to certain private foundations, subject to complex ordering rules and five‑year carryforwards. Within these ceilings, high‑net‑worth donors may bunch multi‑year giving into a single tax year via donor‑advised funds, supporting organizations, or private foundations to maximize the deduction in high‑income years.
For clients with more than 30 million, year‑end charitable planning often pairs charitable gifts with large non‑charitable transfers: for example, funding a charitable remainder trust (CRT) to diversify a concentrated position while deferring gain and securing an immediate income‑tax deduction, or using a charitable lead annuity trust (CLAT) to shift appreciation to heirs at a reduced transfer‑tax cost while benefitting charity in the near term. These split‑interest arrangements are heavily regulated and must satisfy strict actuarial and documentation standards to secure the intended deductions.
Coordinating Income Tax, Transfer Tax, And Liquidity
Year‑end planning for ultra‑high‑net‑worth families requires coordination of income‑tax savings, transfer‑tax minimization, and long‑term family governance. In practice, this may involve:
· Maximizing annual‑exclusion and § 2503(e) transfers by delivering and cashing checks, wiring funds, and paying tuition/medical expenses before December 31.
Using large year‑end gifts to irrevocable trusts to consume expiring lifetime exemption, calibrated against liquidity needs and anticipated business or investment events.
Stacking charitable gifts (including to donor‑advised funds or CRT/CLAT structures) up to applicable AGI limits in years with unusually high income, while preserving carryforwards for future years.
Because these strategies interact with intricate provisions of the IRC, Treasury Regulations, and judicial authority interpreting “present interests,” valuation, and charitable deductions, families with assets above 30 million should implement year‑end gifts only with individualized advice from experienced tax and estate counsel.
For more information on how to use gifting to maximize your overall estate planning strategies please reach out to North Carolina Estate Planning & Fiduciary Law at 704-248-6325.