Estate tax remains one of the most significant wealth-eroding factors for high net worth individuals and families. With federal estate tax rates reaching 40% and some states (such as Massachusetts) imposing additional estate or inheritance taxes, strategic planning becomes not just beneficial but essential. Strategic gifting programs represent one of the most powerful and flexible approaches to mitigate these taxes while accomplishing broader family wealth objectives. When properly structured, these programs can transfer substantial wealth to future generations while minimizing tax exposure, ideally across multiple generations.

Understanding the Current Estate Tax Landscape

The U.S. estate tax system operates with several key thresholds and exemptions that form the statutory framework for strategic tax planning. For the remainder of 2025, each individual has a lifetime gift and estate tax exemption of $13.99 million (adjusted annually for inflation), meaning assets up to this amount can be transferred during life or at death without triggering federal gift or estate tax. For married couples, this effectively creates a combined exemption of $27.98 million through proper planning.

Note that President Trump’s One Big Beautiful Bill, signed by him on July 4, 2025, permanently increases the lifetime gift and estate tax exemption to $15.0 million per individual or $30.0 million for a married couple, with the annual inflation adjustment. As a result, the generation-skipping transfer (GST) exemption will also be increased to $15.0 million per individual and $30.0 million for a couple.

This scheduled increase in 2026 is permanent (absent a change in legislation). It offers additional opportunities for ultra-wealthy families to shift enormous amounts of wealth free of any federal transfer taxes.

Annual Exclusion Gifting: A Cornerstone Strategy

The simplest gifting strategy leverages the annual gift tax exclusion, which allows any individual to give up to $19,000 (for 2025) per recipient per year without using any lifetime exemption. This annual exclusion operates separately from the lifetime exemption and represents a use-it-or-lose-it opportunity each calendar year; that is, any unused exclusion cannot be carried over to the next calendar year.

For a married couple with three children and six grandchildren, this represents the potential to transfer $342,000 annually ($19,000 × 2 donors × 9 recipients) without utilizing any of their lifetime exemption. Over the course of a decade, this amounts to over $3.4 million transferred tax-free, plus any appreciation on those assets that occurs after the transfer.

The power of annual exclusion gifting extends beyond direct gifts. When structured using certain types of irrevocable trust (often referred to as Crummey trusts) that contain special withdrawal provisions, these annual exclusion gifts can be placed in protective trust structures while still qualifying for the annual gift tax exclusion.

Leveraging Appreciation Through Advanced Gifting Vehicles

While annual exclusion gifting represents an important foundation, sophisticated estate planning involves gifting assets with appreciation potential, effectively transferring future growth outside the family’s taxable estate. Several vehicles excel at this objective:

• Intentionally Defective Grantor Trusts (IDGTs)
IDGTs create a powerful tax asymmetry by being recognized as separate from the grantor for estate tax purposes but ignored for income tax purposes. This allows the grantor to sell appreciating assets to the trust without triggering capital gains tax, while also permitting the grantor to pay the trust's income taxes without those payments being considered additional gifts.

When structured around assets with significant appreciation potential, such as closely held business interests or real estate holdings, IDGTs can transfer enormous wealth while consuming minimal exemption amounts. The grantor's payment of income taxes further amplifies wealth transfer by allowing trust assets to grow without reduction for income taxes.

• Grantor Retained Annuity Trusts (GRATs)
GRATs offer a particularly powerful tool in low-interest-rate environments. These trusts involve the grantor retaining the right to receive an annuity payment for a specified term, with any remaining assets passing to beneficiaries at the end of the term. When properly structured as "zeroed-out" GRATs, they can transfer appreciation above the IRS-prescribed ‘hurdle” interest rate with minimal or no gift tax cost.

Short-term, rolling GRATs (typically two to three years) provide flexibility and reduced mortality risk while capturing appreciation above the hurdle rate in successive GRATs. For business owners anticipating liquidity events or holding volatile assets, GRATs can be particularly effective at transferring potential future appreciation with minimal exemption usage.

• Spousal Lifetime Access Trusts (SLATs)
Some clients are reluctant to make a large gift to their children or other family beneficiaries due to the possibility of “donor remorse” in making the gift, i.e., fearing that the donor might need or want access to the gifted assets in the future. The SLAT is an irrevocable trust typically established to receive gifts for the donor’s children, and also includes the donor’s spouse as a permissible beneficiary, subject to the Trustee’s discretion.

Family Limited Partnerships and Limited Liability Companies

Family limited partnerships (FLPs) and limited liability companies (LLCs) remain valuable tools for consolidating family assets, creating opportunities for gifts with valuation discounts. By transferring minority interests in these entities, donors can potentially claim valuation discounts for lack of control and marketability, often ranging from 20% to 40% when substantiated by qualified appraisals.

While the IRS scrutinizes these arrangements carefully, properly structured entities with legitimate business purposes and rigorous maintenance can still achieve significant transfer tax savings. The key lies in establishing and operating these entities with appropriate formalities and economic substance beyond tax planning.

Direct Payment of Educational and Medical Exclusions are Overlooked Opportunities

Perhaps the most underutilized gifting strategies involve direct payments for medical expenses and tuition. These payments, when made directly to the provider rather than to the beneficiary, are completely exempt from gift tax and do not count against either the annual exclusion or lifetime exemption amounts.

For families prioritizing education across generations, prepaying multiple years of private school or university tuition over multiple years can transfer substantial wealth outside the gift tax system (and obviously helping out the parents of such students). Similarly, covering health insurance premiums or establishing medical expense reimbursement plans can provide substantial tax-free benefits to family members.

The power of these exclusions becomes particularly evident when considering multi-generational planning. Wealthy senior generation members can fund education for their grandchildren or even great-grandchildren without incurring any transfer tax costs, effectively moving resources across multiple generations tax-free.

Charitable Components: Enhancing Tax Benefits

Strategic gifting need not focus exclusively on family transfers. Charitable planning can complement family wealth transfers while generating income tax benefits that partially offset the overall tax cost of comprehensive estate planning.

Charitable lead trusts (CLTs) provide a specified income stream to charities for a set term, with the remaining assets passing to family beneficiaries. In low-interest-rate environments, these vehicles can transfer significant wealth to the family while generating substantial income or estate tax charitable deductions.

Conversely, charitable remainder trusts (CRTs) can provide an income stream to family members with remainder interests passing to charity, often generating valuable income tax deductions while diversifying concentrated positions without immediate capital gains tax consequences.

Estate Tax Savings vs. Higher Capital Gains Taxes

Note that the donee of a gift must use the donor’s income tax basis going forward, i.e., receives a “carry-over” basis from the donor for income tax purposes for the transferred asset. If the donee sells the gifted asset in the future, the unrealized appreciation occurring both pre-gift and post-gift must be recognized, and a capital gains tax paid by the donee at a federal rate of at least 20%. If instead the donor transferred the asset to the donee when the donor died, the donee would receive a “stepped up” basis to the asset’s value at the donor’s death and could sell the asset without paying capital gains tax on the unrealized appreciation occurring during the donor’s lifetime.

The proper analysis when considering any gifting strategy is to compare the likely estate tax savings with the potential capital gains tax on a future sale of the asset, especially when many families will not owe any federal estate taxes in light of the permanent $15.0 million/$30.0 million estate tax exemption effective January 1, 2026.

The Imperative of Integrated Planning

Strategic gifting represents not merely a technical exercise in tax avoidance, but a comprehensive approach to family wealth transfer that considers both income tax and estate tax efficiencies, as well as a family’s broader non-tax objectives. The most successful gifting programs integrate multiple techniques tailored to specific asset classes, family dynamics, and philanthropic goals.

However, such planning must strike a balance between tax efficiency and practical considerations of maintaining sufficient resources to meet the donors' lifetime needs and objectives.

The most effective approach typically involves layering multiple strategies - combining annual exclusion gifts, lifetime exemption use, and tax-free transfers for medical and educational purposes - within a coherent framework that advances both tax and non-tax family objectives. When executed with careful attention to technical requirements and family governance considerations, strategic gifting programs can preserve family wealth for generations while minimizing the erosive impact of transfer taxes.

Richard P. Breed, III is a partner at Tarlow Breed Hart & Rodgers, P.C. in Boston, Mass. Please connect with Rick at www.linkedin.com/in/rick-breed/