The Pros And Cons Of Gifting Strategies

Estate Planning is critical for high-net-worth individuals to ensure wealth preservation, tax efficiency, and seamless transfer of assets to heirs or charitable institutions.  One way to plan during life is through gifting.  Below, an East Greenwich, RI will lawyer who has helped families with net worths as large as $300 million will explore the advantages and drawbacks of lifetime gifting strategies for high-net-worth families.

Advantages Of Lifetime Gifting

Gifting under the annual gift tax exclusion ($18,000 per recipient in 2025) can be an extremely tax efficient way to lower the estate without incurring taxes or reducing the lifetime estate tax or gift tax exemptions.  There is no limit to the number of people that individuals can gift the annual exclusion to.  A married couple can gift twice the amount of the annual gift tax exclusion.  Moreover, appreciable assets are gifted at their current value allowing future growth to be free from estate tax inclusion.

Gifting can help high-net-worth individuals and families support their values while still alive.  For example, they can fund their children or grandchildren’s education or help them buy a home.  It can also be a good test of their heirs’ responsibility with inheritance which could be illustrative of how funds later gifted in trust should be distributed.

For those with charitable inclination, gifting provides the ability to support causes while still living with the added benefit of a tax deduction.  Donating appreciated assets such as stocks can avoid capital gains taxes.

Absent fraud and issues related to bankruptcy law, once gifted assets are no longer subject to the donor’s creditors.  This creditor protection can still be achieved by making the transfer to a properly gifted trust.

Cons Of Lifetime Gifting

Once gifted, the donor will not have control or access to those assets.  While there is a benefit in lowering estate tax liability, living longer than expected or a financial emergency can leave the donor wishing that they still had access to the gifted assets.

Sometimes gifting requires sophisticated planning, such as establishing irrevocable trusts.  Most irrevocable trusts incur legal and administrative fees as well as ongoing management and compliance.

For some, lifetime gifting can inhibit their adult children from becoming fully independent.  An annual gifting strategy can result in your children coming to rely on that money and encourage poor financial decisions.

Another con is the loss of basis step up to heirs at death.  Generally, assets included in the estate of a decedent receive a step up in basis to the fair market value of the asset at the date of death.  By gifting appreciable assets during lifetime, individuals are passing along the income tax liability along with the gift.  This may or may not be an issue depending on the tax bracket of the recipient.

Lifetime gifting can be a powerful tool for high-net-worth families and individuals to reduce their estate tax burden while allowing them to see the benefit of their legacy gifts while still living.  There are, as discussed, some downsides to consider.  While there are pros and cons, a lawyer can assist in exploring your wants and guide high-net-worth individuals and families in determining the best estate planning strategy for you. Contact Aptt Law LLC to set up your will today; founded in 2014, we have helped countless clients just like you with estate planning!