With the holidays around the corner, now is a prime time to consider whether gifting makes sense for you, and if so, to whom said gifts should be made and in what amount(s). Yet, in weighing the different variables, a misconception frequently arises that one can only gift up to a certain amount annually without paying a gift tax. This is not accurate.
Over the course of one’s life and upon one’s death, an individual can gift up to the amount of the Federal Estate and Gift Tax (FEGT) exemption—currently $13,990,000 per person for 2025 and increasing to $15,000,000 per person in 2026—without incurring a Federal Estate and Gift Tax. It’s only when the total of one’s lifetime gifts and transfers upon death exceed the FEGT exemption that such tax is due.
The annual figure usually being referenced, albeit within the incorrect context, is the personal exclusion (PE) amount, which is currently $19,000 per person for 2025. One can gift up to the PE amount to as many people per year as desired without using any of their FEGT exemption. If said gift exceeds this amount, then the overage is applied toward the FEGT exemption, and one’s FEGT exemption is reduced by the amount of the overage.
For example, if John has made no taxable gifts during his lifetime and transfers $100,000 to his friend, Jane, this year, then John wouldn’t pay any gift taxes on the gift, however, by April 15, 2026, he would need to file a gift tax return demonstrating that $81,000 ($100,000 minus $19,000) has been deducted from his lifetime FEGT exemption of $15,000,000. This leaves John with $14,919,000 of his FEGT remaining, before any Federal Estate and Gift Tax is incurred. Also, if John is married, then John and his spouse can make a combined tax-free gift of $38,000 per person per year regardless of which spouse is actually making the gift.
Notably, if an individual pays for the educational or medical expenses of another and makes the payment directly to the educational/medical institution, there’s no limit to the amount of the gift and said gift won’t count toward the FEGT exemption either.
Gifting has different implications when it comes to long-term care planning: While the above-referenced gifts can be made without incurring a gift tax, such gifts could create a period of ineligibility for Medicaid. John’s gift to Jane could trigger a five-year lookback period for institutional Medicaid, and potentially for community Medicaid (once the 30-month lookback period is implemented), if Medicaid deems the gift as having been made for Medicaid eligibility purposes.
When it comes to reducing the size of your taxable estate and protecting assets from the cost of long-term care, gifting can be an excellent strategy, however, it’s crucial to understand the ramifications of gifting, particularly as one ages. By making gifts in a thoughtful and orchestrated manner (such as by utilizing a trust), you can help ensure the financial stability of your loved ones’ futures and your own.
