Using Tax-Free Gifts for Wealth Transfer

Recently, inflation rates and tax law changes enacted by the One Big Beautiful Tax Act signed into law on July 4, 2025 have altered the amounts used for certain exemptions applicable to federal gift and estate taxes. The federal gift and estate tax exemption is currently $13,990,000 for gifts made, or decedents dying, in 2025. The exemption is scheduled to increase to $15,000,000 in 2026, and is to be adjusted for inflation in later years. Although the recent tax legislation increased the scheduled exemptions for 2026 and beyond, certain estate planning techniques can continue to be deployed, allowing taxpayers to transfer significant wealth to heirs without using the federal gift and estate tax exemption.

A simple way for taxpayers to transfer wealth over time is to make annual exclusion gifts and payments for educational or medical expenses on behalf of others. These “tax-free” gifts can be extremely effective in reducing one’s taxable estate.

Annual Exclusion Gifts

Under current law applicable in 2025, every individual can give away up to $19,000 to as many individuals as he or she wants without using any federal gift and estate tax exemption. For 2026, the annual exclusion amount is not scheduled to be adjusted for inflation, so it will remain at $19,000. Married couples can each give $19,000 to the same individual such that their total annual exclusion gifts to any one individual are $38,000. If a couple has three children, for example, they can give $114,000 away in annual exclusion gifts to their children without consuming any portion of their lifetime exemptions. In 2026, they can do the same. If the couple has not yet used their annual exclusion to make any gifts to their children during 2025 and makes gifts prior to the end of 2025 and in the beginning of 2026, that will allow a total of $228,000 to be gifted tax-free to their children over the next few months.

These transfers do not have to be outright. Various trusts for the benefit of family members (e.g., children, grandchildren, nieces and nephews) can qualify as recipients of annual exclusion gifts. Establishing such trusts can provide several advantages, including:

• Protecting the assets from the beneficiary’s creditors
• Providing the opportunity to avoid federal transfer taxes on the trust property for generations
• Having a vehicle for other planning techniques, such as loans or sales (if beneficial under future law)

The following hypothetical illustration highlights the potential effectiveness of making annual exclusion gifts over time:

A married couple creates one or more trusts for the benefit of their two children and five grandchildren. In Year 1 (2025), the couple gifts $38,000 to a qualifying trust for each child and grandchild for a total of $266,000. In Year 2 (2026), the couple gifts another $266,000, for an aggregate total of $532,000. Assume these annual gifts were made on January 1, 2025 and January 1, 2026, each year thereafter, annual exclusion gifts of $38,000 (ignoring future upward inflation adjustments) are made to each individual or trust for his or her benefit, and no distributions or payments are made from the trust. If invested in a portfolio that realizes an assumed annual rate of return of 5.5%, the potential growth may be significant, as shown below.

Source: Neuberger Berman. The illustration is only to demonstrate the concepts discussed and is not, and is not intended to be, representative of the performance of any Neuberger Berman investment product or portfolio. This material is for educational purposes only and nothing herein constitutes investment advice or an investment recommendation. It is not intended to represent, and should not be construed to represent, a prediction of future rates of return. The illustration does not reflect fees and expenses associated with managing a portfolio. If fees and expenses were reflected, results shown would be lower. Investing entails risks, including possible loss of principal.

If desired, spouses of children and grandchildren may be added as donees of the annual exclusion gifts and as beneficiaries of the trusts. By expanding the class of beneficiaries, even greater federal gift and estate tax savings can be achieved.

The transfer tax savings on these gifts can be measured by the federal (and state, if applicable) estate tax rate multiplied by the future value of the gifts in the year of death. Assuming a combined federal and state estate tax rate of 45% (although this rate may be higher in future years) and a future value of the gifts, as set forth above in Year 20, in the amount of $9,785,096, transfer tax savings in the year of death would be $4,403,293. Further, at the end of the 20-year period, the donors will have gifted $9,785,096 to one or more trusts for their heirs, allowing the heirs access to the funds without an associated transfer tax burden, and their exemptions will have been available to offset other transfers.

It should also be noted that annual exclusion gifts can be used to fund 529 plans, which can be established to help individuals save for and pay the costs of education, including college, vocational schools and expenses of qualifying private, public and religious institutions offering a kindergarten-through-12th-grade education. As a bonus, individuals are permitted to “superfund” a contribution to a 529 plan with up to five years of annual exclusions in one year. In 2025, gifts totaling up to $95,000 per beneficiary ($190,000 for married individuals) are allowed to be transferred into such plans.

Payment of Educational and Medical Expenses

Significant transfer-tax savings can also be achieved by taking advantage of the exemption allowed for certain unlimited payments for educational and medical expenses. Under current law, any amount paid on behalf of an individual as tuition to an educational organization, or to any provider of medical care with respect to such individual, is not treated as a transfer of property for gift tax purposes. For gifts to qualify under this exception, payments must be made directly to the educational or medical provider. Reimbursements to the individual for these expenses will not qualify.

Given the high cost of private elementary/secondary school and college, meaningful savings can be achieved by paying tuition on behalf of other individuals. Assume that a grandparent has five grandchildren attending college with a tuition of $65,000 per year for four years. Total tuition for each grandchild would be $260,000. Total tuition for all five grandchildren would be $1,300,000. Ignoring the future value of these tuition payments and applying a federal and state estate tax rate of 45%, the transfer tax savings would be $585,000, and neither the grandparent’s exemption nor annual exclusions will have been consumed.

Conclusion: Benefiting From Existing Transfer Tools

For individuals looking to take advantage of current (and likely future) transfer tax laws, annual exclusion gifts and transfers for educational and medical expenses can yield significant gift and estate transfer tax savings. In our view, it is important not to overlook the benefits of establishing and maintaining a regular gifting plan employing these tax tools.