I recently sat with a client from Brooklyn who wanted to help her daughter buy her first apartment. She planned to give her $200,000 for the down payment—a life-changing gift. But she was worried. “Will I have to write a check to the IRS for 40% of this?” she asked. “I want to help my daughter, not create a tax problem.”
This is a question I hear often. The impulse to provide for the next generation is powerful, but it comes with a fear of the federal gift tax. The tax code, however, is not designed to penalize everyday generosity. With a deliberate plan, you can make significant gifts to family members without triggering an immediate tax liability. This is a matter of stewardship—managing your assets prudently for the benefit of those you care about.
The Two Numbers That Govern Gifting
The federal gift tax is governed by two key figures set by the IRS. Understanding how they interact is the first step in any gifting strategy.
First is the annual gift tax exclusion. For 2024, this amount is $18,000 per recipient. You can give up to $18,000 to any number of individuals—your son, your niece, a friend—in a single year without reporting these gifts to the IRS. They are, for tax purposes, free and clear.
Second is the lifetime gift and estate tax exemption. This is a much larger number—$13.61 million per individual in 2024. This exemption is the total amount you can give away during your lifetime or leave to heirs at your death before any federal gift or estate tax is owed.
What happens when a gift exceeds the $18,000 annual exclusion? In my client’s $200,000 gift, the first $18,000 is covered by the annual exclusion. The remaining $182,000 is a taxable gift. However, she would not write a check to the IRS. Instead, we would file a gift tax return (Form 709) to report that she used $182,000 of her $13.61 million lifetime exemption. No tax is due until that entire lifetime amount is exhausted.
Strategic Gifting for Married Couples
For married couples, the opportunities for gifting expand. Because each spouse has their own annual and lifetime exemptions, they can combine their efforts to provide more substantial support.
This is known as “gift splitting.” A married couple can jointly give up to $36,000 ($18,000 from each spouse) to a single recipient in one year without filing a gift tax return. This is a common way for parents and grandparents to help with a down payment, fund a 529 college savings plan, or provide seed money for a new business.
Even for gifts larger than $36,000, gift splitting is a prudent move. If my client and her husband gave the $200,000 jointly, they could elect to split the gift. After applying their combined $36,000 annual exclusion, the remaining taxable gift would be $164,000. By splitting it, each spouse would report a gift of $82,000 against their individual lifetime exemption. This approach preserves more of each person’s exemption for future use—a more balanced and intentional way to structure a generational transfer.
Beyond Cash: Qualified Transfers and New York’s Rules
While the annual and lifetime exemptions cover most situations, other provisions exist for those making large or ongoing gifts. Two are particularly relevant for the families we represent.
Qualified Transfers
Certain payments are not considered gifts at all. Under Section 2503(e) of the Internal Revenue Code, if you pay for someone’s tuition or medical expenses, that amount is completely exempt from the gift tax. The key is that the payment must be made directly to the institution—the university, the hospital, or the doctor’s office. Writing a check to your grandchild for them to pay tuition is a taxable gift; paying the bursar’s office on their behalf is not. This is a powerful tool for grandparents who want to fund an education without eroding their lifetime exemption.
New York’s Estate Tax “Clawback”
While the federal gift tax is often the primary concern, we must also consider New York State’s separate estate tax. New York has a unique provision that can impact last-minute gifting. Under New York Tax Law § 954, certain taxable gifts made within three years of a person’s death can be “clawed back” into their estate for the purpose of calculating New York estate tax. This rule is designed to prevent deathbed transfers intended solely to reduce the estate’s value below the New York exemption threshold. This makes long-term, deliberate gift planning—not eleventh-hour decisions—all the more critical for New York residents.
Ultimately, the goal of a gifting strategy is not just tax avoidance. It is about creating a legacy, providing opportunity, and acting as a responsible custodian of the wealth you have built. The tax code provides the framework, but your family’s values provide the purpose.
If you are planning to make a significant gift to a family member, the first step is to clarify the purpose and structure of that gift. I invite you to schedule a consultation with our firm to review how your gifting strategy fits within your broader legacy and asset protection goals.
