A client sat in my Manhattan office last week with a straightforward goal. “Russel,” he said, “my daughter is trying to buy her first apartment. I want to give her $100,000 for the down payment. Can I just write her a check, or will the IRS take a piece of it?”
It’s a common question. The instinct to provide for your children and grandchildren is fundamental. Done with intention, gifting can be one of the most effective ways to transfer wealth and reduce the size of your future taxable estate. But generosity, in the eyes of the government, has rules. Understanding them is the first step in prudent stewardship of your family’s legacy.
The Annual Gift Tax Exclusion
The foundation of tax-efficient gifting is the annual gift tax exclusion. For 2024, the IRS allows you to give up to $18,000 to any single individual without any tax consequences. You do not have to report it, and the recipient does not pay income tax on it. It’s a clean transfer.
This exclusion is granted per donor, per recipient. This is where a deliberate strategy comes into play. If you are married, you and your spouse can each give $18,000 to the same person. In my client’s case, he and his wife could together give their daughter $36,000 this year. If their daughter is married, they could also give $36,000 to her spouse, for a total of $72,000 transferred to the couple’s household, tax-free.
This is a “use it or lose it” opportunity. The $18,000 allowance does not roll over. On January 1st of each year, the slate is wiped clean, and a new annual exclusion becomes available. For families with significant assets, making these annual exclusion gifts every year can move a substantial amount of wealth to the next generation without ever touching the larger tax exemptions.
Beyond the Annual Limit: The Lifetime Exemption
So, what about the rest of my client’s intended $100,000 gift? He wanted to give his daughter more than the $36,000 he and his wife could gift under the annual exclusion. This is where the lifetime gift and estate tax exemption comes in.
Exceeding the annual exclusion does not automatically trigger a tax bill. It does, however, trigger a paperwork requirement. Any gift over the $18,000 annual limit requires you to file a federal gift tax return, Form 709. The amount given above the exclusion—in my client’s case, $64,000—is then subtracted from the donor’s lifetime exemption.
For 2024, the federal lifetime gift and estate tax exemption is a historic high of $13.61 million per person. This means an individual can give away that much money during their life or at their death before any federal gift or estate tax is due. By filing Form 709, my client is simply notifying the IRS that he has used up $64,000 of his $13.61 million lifetime credit.
This high federal exemption is temporary. Under current law, it is scheduled to be cut roughly in half at the end of 2025, making strategic planning over the next year a serious consideration for high-net-worth families.
Special Gifting Rules and New York Estate Tax
Not all transfers of wealth are considered “gifts” by the IRS. There are two powerful exceptions:
- Direct payment of tuition: You can pay any amount of tuition for someone, as long as you pay the educational institution directly.
- Direct payment of medical expenses: You can pay any amount for medical care, provided you pay the hospital, doctor, or insurance provider directly.
These payments do not count against your annual exclusion or your lifetime exemption. They are a separate, unlimited category of tax-free giving.
Federal rules are not the only consideration. New York has its own estate tax with a much lower exemption—$6.94 million for 2024. While the state does not have a gift tax, gifts made within three years of death can be “clawed back” into the decedent’s estate under New York Tax Law § 954. This three-year look-back period means a prudent gifting strategy requires planning well in advance.
Stewardship. It’s about more than just writing a check. It’s about understanding the rules and acting with purpose to support your family and preserve the legacy you’ve built.
If you are considering substantial gifts as part of your family’s generational wealth plan, the next step is to map those intentions against your lifetime exemption. I invite you to schedule a review of your current asset structure to determine how a strategic gifting plan fits into your larger legacy goals.
