Using the Annual Gift Tax Exclusion to Reduce Your Taxable Estate

With the federal lifetime gift and estate tax exemption for 2026 set at $15 million per individual and $30 million for married couples, most individuals will not need to worry about estate or gift taxes during their lifetime.

However, the annual gift tax exclusion, set at $19,000 per recipient in 2026, remains an important planning tool. What does this mean, and who should be paying attention to it?

How Does the Annual Gift Tax Exclusion Work?

Over their lifetime, an individual can gift up to $15 million (under current 2026 tax law) before any federal gift tax is owed. 

The annual gift tax exclusion is the amount that individuals can gift each year without counting against this lifetime limit of $15 million. Only amounts over this lifetime exemption are taxed. If gifts exceed the annual exclusion, the excess amount is not immediately taxed. Instead, it reduces the individual’s remaining lifetime exemption and must be reported on IRS Form 709.

Gift and estate taxes are unified, meaning total lifetime gifts and the value of an estate at death are combined when determining whether taxes are owed. Amounts exceeding the exemption are generally taxed at a top federal rate of 40%.

For example, if a taxable estate of $20 million is passed to beneficiaries, and the exemption is $15 million, the $5 million excess could be subject to federal estate tax, resulting in a potential $2 million tax liability.

Who Can Benefit from the Annual Gift Tax Exclusion?

The annual exclusion is particularly useful for individuals and families whose estates may approach or exceed the federal exemption.

As previously mentioned, an individual can gift up to $19,000 per year to any individual before counting against the lifetime gift tax exemption. Married couples can choose to “split gift” and can gift up to $38,000 per recipient, utilizing the annual exclusion. 

Furthermore, if gifting to a husband and wife, a married couple can gift $38,000 to each spouse, thus gifting the couple up to $76,000 using the annual exclusion.

As we can see, over time, these gifts can meaningfully reduce a taxable estate.

Planning Considerations

For high-net-worth families, the annual gift tax exclusion can be an effective way to transfer wealth while preserving the lifetime exemption. 

It is also important to note that the current lifetime exemption levels may be reduced in the future due to changes in tax law. As a result, proactive strategies, including annual gifting, may become increasingly valuable.

Please consult with your financial team - including your financial advisor, CPA, and estate planning attorney when evaluating gift and estate tax strategies.

- Bill Rautiola, RICP®, AIF ®, PPC ®

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.