How to Use Gifting Strategies to Reduce Future Taxes

Strategic gifting, trusts, and direct payments can help reduce your taxable estate.

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Affluent families may have to face the burden of the estate tax. This is a tax levied on the transfer of property upon death before it can pass onto beneficiaries. And the rate can be as high as 40 percent. But it only applies to the value of your estate that goes beyond a certain threshold.

In addition, your generosity in your lifetime can go a long way in reducing your taxable estate. So you may be able to bypass the estate tax entirely through various gifting strategies. Let’s explore some.

Take Advantage of the Annual and Lifetime Exclusions

In 2025, you can give up to $19,000 to an unlimited number of individuals. This is known as the annual exclusion. It will remain the same in 2026.

This means that you can give up to $19,000 in cash or assets in 2025 per recipient to your son, daughter, friends, or anyone, including entities such as charities, without facing the gift tax. A married couple can double that annual exclusion to $38,000 per recipient without owing any gift tax. And by doing so, you shrink the size of your taxable estate. Moreover, if the assets you give appreciate in value, this will also occur outside your estate.

But even if you go beyond those thresholds, it doesn’t necessarily mean you’d owe a gift tax. But you would have to report it on IRS form 709. The amount that goes over will eat into your lifetime gift and estate tax exemption. For 2025, that’s $13.99 million per individual. For married couples, the combined exemption rises to $27.98 million. Once you breach those levels, you may face a gift and estate tax. But keep in mind that by gifting in your lifetime, you are essentially reducing the value of your estate. So if done right, you can transfer what you have left upon death without owing any estate tax.

Pay Someone’s Tuition or Medical Bills Directly

The IRS allows you to make unlimited tax-free payments toward someone else’s educational tuition or medical bills. The average tuition for a private four-year school is about $43,350. So you can pay off your grandchildren’s tuition without incurring a gift tax. Moreover, it won’t apply to your annual gift exclusion of $19,000 for 2025. The same goes for medical bills. But there’s a key point you need to remember: These payments must go directly toward the educational institution or medical provider.

Open a Trust Fund

Trust accounts can be smart ways to pass on large amounts of assets to your beneficiaries without incurring a gift tax. When you transfer these assets to the trust, the trust becomes the official owner of these assets as well as any appreciation. This means that they technically leave your estate. So when they pass onto beneficiaries, they pass on estate tax-free in most cases.

One popular type of trust is an irrevocable living trust. By transferring assets to an irrevocable trust, you lose ownership. But it can be an effective way to reduce your estate and make sure the right beneficiaries receive what you intend to leave behind for them. And you can transfer virtually any type of asset. This can include physical property like real estate or a vehicle. And it can also include large investment and other financial accounts as well as life insurance policies.

Create a Charitable Trust

Giving to charity not only helps those less fortunate but can also be an effective tax-reduction strategy. In fact, a charitable trust can be a good way to give to yourself, your beneficiaries, and charities while enjoying tax benefits. As a donor to the charitable trust, you get an income tax deduction when you fund the trust.

One type of charitable trust is known as a charitable remainder trust. With this type of trust, you transfer assets, and then a stream of income is transferred to yourself or another beneficiary for a set period of time. Afterward, what remains passes over to IRS-approved charities of your choice.

There are two subsets of charitable remainder trusts. A charitable remainder annuity trust provides a fixed annuity amount to the beneficiary each year, and a charitable remainder unitrust pays the beneficiary a fixed percentage of trust assets each year.

But there’s also a charitable lead trust. This type of trust provides a stream of income to charities for a set period of time. And then the remainder goes to yourself or another beneficiary.

There are also two types of charitable lead trusts. A charitable lead annuity trust provides a fixed annuity amount to the charity each year, and a charitable lead unitrust provides the charity with a fixed percentage of trust assets each year.

The Bottom Line

Gifting in your lifetime can be a great way to support your loved ones as well as charities. And it can also provide you with tax breaks. If you’re worried about the estate tax, be sure to take advantage of the lifetime gift and estate tax exemption. And you can also receive tax benefits by paying off a loved one’s tuition or medical bills, as well as creating trust funds. These actions can reduce the size of your taxable estate over time and thereby avoid estate taxes.

The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.