If estate taxes could apply to your estate, a simple response may come to your mind. When the end is near, you can simply give your children their inheritances in advance, right?
In reality, it may not be that simple. Let’s look at the matter of gift giving as a way to get around estate taxes.
Back in the Day
People could take this approach right after the federal estate tax was enacted in 1916, but a gift tax was enacted in 1924. It was repealed two years later, but it was reenacted in 1932 and has been in place since then.
Unification of Gift and Estate Taxes
Today, the federal gift tax and estate tax are “unified.” That means they share a single lifetime exemption, formally known as the unified credit.
As of 2025, the federal unified exclusion is $13.99 million per person. You can transfer up to that amount during life or at death before any tax is owed. If you give away $3 million during your lifetime in taxable gifts, you would have $10.99 million of exemption remaining for your estate.
Spouses can combine their exclusions, which means a married couple can protect $27.98 million from gift and estate taxes with proper planning.
This system allows for generous tax-free giving, but it also means your lifetime gifts reduce your available estate tax shield. So, giving your children large gifts won’t necessarily help avoid estate taxes unless those gifts stay within the exemption.
Additional Gift Tax Exclusions
In addition to the lifetime exemption, the tax code provides annual exclusions and other specialized exceptions.
In 2025, you can give up to $19,000 per person per year to as many individuals as you want without using any of your unified exclusion. A married couple can give $38,000 per year per recipient by making a split gift.
Beyond that, there are two key exclusions that don’t count toward the annual or lifetime limits:
- Medical payments: You can pay medical expenses directly to a provider on someone else’s behalf without triggering gift tax.
- Tuition payments: You can pay tuition directly to an educational institution without using up your exemption or annual exclusion.
These rules allow you to reduce your taxable estate gradually without affecting your children’s eligibility for future estate tax benefits.
Gifting Strategies
While casual gifts are helpful, larger estates often call for strategic gifting.
- Gift splitting: As noted, married couples can elect to treat a gift made by one spouse as if both made it. This doubles the annual exclusion for gifts to each recipient.
- Irrevocable Life Insurance Trusts (ILITs): You can make annual gifts to an ILIT to cover life insurance premiums. The death benefit passes tax-free and outside of your estate.
- Family Limited Partnerships (FLPs): You may transfer business or investment interests to children at a discounted value, leveraging your lifetime exclusion more effectively.
- Grantor Retained Annuity Trusts (GRATs): While more complex, these allow you to pass appreciation to your children without gift tax on the full value of the assets transferred.
These strategies require professional legal and tax guidance, especially when trusts or business entities are involved. But they can help reduce the taxable value of your estate over time without triggering unnecessary tax consequences.
Connecticut Estate and Gift Tax
While federal taxes tend to get the most attention, Connecticut is the only state that imposes both an estate tax and a gift tax. Connecticut’s transfer tax exemption is currently aligned with the federal amount at $13.99 million.
Summing It Up
Giving your children their inheritance in advance may not eliminate estate tax exposure, but that doesn’t mean gifting isn’t useful. When used properly, gifts can reduce your taxable estate, support your family, and open the door to advanced wealth transfer strategies.
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There is no reason to take any chances with your hard-earned legacy. When you work with our firm, you will come away with a comprehensive plan that is tailor-made to suit your specific needs.
We have a Glastonbury, CT estate planning office, and another location in Westport, and you can call us at 860-548-1000 to set up a consultation at either office. If you would rather send us a message, fill out our contact form, and we will be back in touch with you as soon as possible. We also invite you to join us at a Complimentary Seminar so you can see just how important it is to have a plan in place.
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