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Legacy gifting, in which families leave assets to loved ones and favorite charities in their will, has long been the dominant method by which households distribute wealth. But a growing number these days are opting instead for lifetime or intentional gifting — passing along their money in a planned way while still alive.
And there’s plenty to pass along. U.S. households (primarily the baby boomer generation) are projected to transfer an estimated $84 trillion of wealth by 2045. Some $72 trillion of that total will go to heirs, with $12 trillion being donated to organizations.1
“With our higher net worth clients, we have seen a greater tendency to partake in intentional gifting,” said Dan Drabinski, a financial professional with Bluecrest Wealth Management in Dallas, Texas. “I would attribute some of this to greater education around taxation and lifetime gifting limits, but there is also an intentionality around creating things like donor-advised funds early on and educating family members on the impact of charitable giving.”
Campaigns such as The Giving Pledge, a movement of philanthropists, including Bill Gates and Warren Buffet, who have committed to donating the majority of their wealth to charitable causes, has also elevated awareness about the potential impact of gifting, he said. (Related: Entering the ‘wealth transfer zone’)
Some of the most popular tax-friendly tools for transferring wealth include:
Gifting assets during your lifetime yields a number of potential benefits. Here, we look at several.
You get to enjoy it
Watching your loved ones put their inheritance to work can be gratifying. Perhaps your son uses it to start a business, your daughter opts to purchase a home, or your granddaughter uses her financial gift to pay for graduate school. By passing your money along before you die, you get to enjoy the fruits of your generosity. The hugs and smiles don’t hurt either.
The opportunity to share life lessons
Lifetime giving enables you to share valuable life lessons about your financial successes and failures, and experiences that may be beneficial as your heirs start making choices about how to spend their inheritance. Is it a better financial decision to expand their investment portfolio, buy a beach house, or pay off debt? The right moves today can potentially help your heirs protect and preserve the assets they receive for future generations.
For third-party expertise, consider connecting them with your financial professional. Those with significant assets may also choose to host family meetings where they can provide basic financial education to the next generation and give them a chance to build money management skills over time.
“Many of our clients have engaged community foundations or other charitable organizations to hold family meetings and plan intentional giving,” said Drabinski. “They are not willing to simply will assets to the next generation with little preparation for how to prepare for the financial windfall.” (Related: How to teach your grandchild financial responsibility)
The chance to share your values
You want your heirs to be good stewards of the inheritance they receive. Self-made millionaires likely wish to outline the character traits that helped them achieve financial success (work ethic, strategic investing, an entrepreneurial spirit), while those who inherited wealth may wish to share the backstory of how their family’s financial legacy was born.
In either case, financial gifts during your lifetime present an excellent opportunity to reinforce your values about money, the meaning of wealth, and your philosophy about giving back. (Related: 5 ways to give back in your community)
“Giving back to your community is seen as part of a 'balanced lifestyle,' and families we work with have found ways to encourage their children to participate in community events so they are better prepared to be a good shepherd to society,” said Drabinski.
Prevent sibling squabbles
Family infighting is all too common after a parent passes away, especially when their estate plan is subject to interpretation, leaving family members (and the probate system) potentially at odds over how best to distribute their loved one’s estate. You can potentially prevent sibling squabbles by passing assets along while you’re around to see it, which is also the only way to be certain that your wealth will be distributed in accordance with your wishes. (Related: How to make sure your heirs won’t fight)
Reduce the size of your taxable estate
Perhaps the biggest benefit of making financial gifts during your lifetime is that it may reduce the size of your taxable estate so that you can pass more of your wealth along to loved ones and causes you care about.
The Internal Revenue Service allows individuals to gift any number of people up to $18,000 ($36,000 for married couples) per year tax-free.2 Thus, a married couple with two children and five grandchildren may transfer up to $252,000 to their descendants each year without triggering a tax bill, which removes those assets from their estate.
Separately, individuals are permitted to gift a total of up to $13.6 million ($27.22 million for married couples) to their heirs (the limit in 2024) without triggering taxes under the lifetime gift and federal estate tax exclusion.
With a limit that high, only the wealthiest American households are forced to pay the federal estate tax. But that may soon change.3 If Congress fails to act, the lifetime gift and federal estate tax exclusion limit will “sunset” or revert back to its previous limit of between $6 million and $7 million (depending on inflation) on December 31, 2025. (Related: The estate planning 2026 question mark)
“Over the next year or two, people may be hustling to take advantage of the current higher estate tax exemption by gifting to their children,” said John Pearson, a financial professional with Barnum Financial Group in Shelton, Connecticut. “Right now, less than 1 percent of the population is subject to the gift and estate tax, but that could change if the provisions are allowed to sunset at the end of 2025.”
Donating to charity
Charitable donations to a qualified organization can also potentially help to reduce your taxable estate while fulfilling your philanthropic mission.
By donating cash directly to a qualified charitable organization, you could receive a tax deduction in the year you donate.
To claim a charitable tax deduction, you must generally itemize your taxes. You would typically be able to deduct up to 60 percent of your adjusted gross income for cash gifts, but your deduction may be limited to 20 percent or 30 percent depending on the type of organization and contribution.4
Another option is to donate a permanent life insurance policy to a favorite cause, which may enable you to give more. When you make a charity the beneficiary of your permanent life insurance policy’s death benefit, you get to retain ownership of the policy during your lifetime, which gives you continued access to the policy’s cash value. The charity would receive the remaining death benefit after you pass away. A healthy adult may be able to purchase a life insurance policy costing a set number of premiums at $100 to $200 a month with a $100,000 benefit, which may be far greater than what the policyowner could donate at one time. (Related: Using life insurance for charity)
Tax-friendly gifting strategies
There are multiple ways to transfer wealth, each with their own tax implications. Those include:
Trusts, which are legal entities that own and manage assets for the benefit of their heirs. Assets moved into a trust can potentially be excluded from the grantor’s estate, so they are no longer subject to estate tax and are also protected from creditors, probate, and legal claims from ex-spouses. (Learn more: How to set up a trust)
In some cases, trusts can be structured to allow the beneficiary access to the resources held in trust while the grantor (or donor) is still alive. For example:
- Grantor-retained annuity trusts (GRATs) The grantor receives payments until the annuity term expires, and any remaining assets after the term expires pass to the beneficiary — removing them from the grantor’s taxable estate.
- Spousal lifetime access trusts (SLATs) This is a type of irrevocable trust that enables grantors to gift assets to a trust for the benefit of their spouse and/or other family members. “Clients who create SLATs want the estate tax benefits and creditor protection of an irrevocable trust, but also want to have indirect access to those assets during their lifetime,” said Drabinski.
Donor-advised funds are also increasingly popular among higher net worth families who wish to engage in charitable giving, said Pearson. Such funds allow individuals to make irrevocable contributions of cash, securities, or appreciated assets in one year; claim the tax deduction immediately; and make grants to a charity of their choice in the future.
“I see a significant use of donor advised funds,” said Pearson. “This is often a tool that is used to transfer appreciated stock at periods when the market has reached a high, but perhaps the decision about which cause to support has not yet been made.”
The stock would then be sold inside of the donor-advised fund at its appreciated level, he said, and the tax deduction computed on the value of the stocks sold. The actual gift to a charity can then be made at the discretion of the donor at a future time.
Conclusion
Contrary to their parents before them, many of today’s retirees are choosing to make financial gifts during their lifetime, rather than leaving their money to heirs in their will.
Lifetime gifting yields a number of potential benefits, both personal and financial.
Because wealth structuring tactics can be complex, however, it is important to consult a tax or estate planning professional for guidance before making any decisions that may affect your taxable estate.
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1 Cerulli Associates, “Cerulli Anticipates $84 Trillion in Wealth Transfers Through 2045,” Jan. 20, 2022.
2 Internal Revenue Service, “What’s New — Estate and Gift Tax,” Nov. 22, 2023.
3 Internal Revenue Service, “Estate and Gift Tax FAQs,” Dec. 5, 2023.
4 Internal Revenue Service, “Charitable Contribution Deductions,” Dec. 5, 2023.