Director of Estate Strategy, Dave Jones, JD, LLM, CFP®, explains how to optimize the impact of your year-end family gifting by leveraging tax exclusions for education, medical expenses, and annual giving.

 

As we move into the final months of the year, now is an excellent time to review your financial situation and consider opportunities to give to family and loved ones. Thoughtful gifting can not only help support those you care about, but also strengthen relationships and assist in achieving important life goals and objectives. This article explores how you can leverage three key tax exclusions to maximize the impact of your generosity: the annual exclusion, the education exclusion, and the medical exclusion.

The Annual Exclusion

The foundation of family gifting and wealth transfer is the annual exclusion gift. In 2024, the annual exclusion limit is $18,000 per recipient, meaning you can give up to $18,000 to as many recipients as you wish without reducing your lifetime exemption ($13.61 million in 2024) or incurring federal gift taxes. For married couples, this exclusion doubles to $36,000 per recipient. Annual exclusion gifts typically take three forms: direct gifts, loan forgiveness, or contributions to certain irrevocable trusts. It’s important to consult with your tax advisor about using these strategies for your specific situation and confirm whether they align with broader estate planning goals.

It’s also worth noting that gift recipients are not responsible for paying any gift taxes; the responsibility lies with those making the gift (and only when the giver has exhausted their annual exclusion and lifetime exemption and no other exclusion applies).

  1. Direct Gifts: The simplest method is giving an outright gift. For example, a parent could write a check to each of their children for $18,000 annually without any tax consequences. As mentioned above, married couples can combine their exclusions to give up to $36,000 per child, doubling the tax-free gift amount. This method can be used to transfer significant wealth when executed over many years.
  2. Loan Forgiveness: Forgiving a loan, or a portion of it, can be treated as a gift that qualifies for the annual exclusion. If you’ve loaned $50,000 to a family member, you could forgive $18,000 of that loan without incurring taxes. If the loan is forgiven in an amount greater than the annual exclusion, the excess would be applied against your lifetime exemption.
  3. Paying Insurance Premiums: Another strategic use of the annual exclusion is by paying life insurance premiums on behalf of someone else, typically through an irrevocable life insurance trust (ILIT). An example of this is when a parent or grandparent makes annual gifts to an ILIT, which then pays the life insurance premiums for a policy benefiting their children and/or grandchildren. Properly structured and administered, this can fund life insurance policies while minimizing estate taxes for your heirs.

The Education Exclusion

Another powerful tool is the education exclusion. Federal tax law allows individuals to pay for someone’s tuition directly to an educational institution without triggering gift taxes or reducing your lifetime exemption. This exclusion applies to all levels of education, from elementary to graduate school. As long as the payments are made directly to the school, the exclusion applies. However, keep in mind that only tuition qualifies: expenses like books, uniforms, and room and board do not. There is no limit on the amount that can be excluded under this rule.

The Medical Exclusion

The medical exclusion allows you to pay for someone’s qualified medical expenses without it counting toward your annual exclusion or lifetime exemption, providing a tax-efficient way to assist loved ones with healthcare costs. Payments must be made directly to the healthcare provider or insurance company, and can include medical treatments, surgeries, dental care, and health insurance premiums. As with any tax strategy, individuals should consult with a tax advisor to ensure compliance and proper implementation of this benefit. Like the education exclusion, there’s no limit on the amount you can pay under this rule.

The Annual Exclusion and 529 Plans: A Special Super-Funding Rule

Fortunately, while the education exclusion applies only to tuition, other educational expenses can be covered through contributions to a 529 plan. Qualified expenses generally include room and board, books, supplies, computers and technology, special needs expenses, and even K-12 tuition and apprenticeship programs. A key tax advantage of 529 plans is the ability to “front-load” contributions by using up to five years’ worth of annual exclusion amounts at once. For example, you can contribute $90,000 to a 529 plan in 2024 and spread the gift over five years for tax purposes, provided you make the proper election on a timely filed gift tax return. For married couples, this amount can be doubled to $180,000.

Combine Gift Exclusions for Maximum Impact

  1. Gifting to Grandchild in College: Imagine you have a grandchild who is living in Los Angeles, has $50,000 in tuition expenses each year, and has regular medical needs. In this scenario, you could pay some or all of the tuition expenses directly to the university, assist with room and board through annual exclusion gifts, and cover their medical expenses using the medical exclusion—all without triggering gift taxes or reducing your lifetime exemption.
  2. Helping an Entrepreneur Child: Now suppose your child is starting a business and facing lean years. They have high-deductible health insurance, do not own a home yet, and your two grandchildren are in private elementary school. You could use the medical exclusion to pay for better health coverage, and loan funds for a down payment on a home. Over time, you could forgive portions of the loan using some or all of the annual exclusion. Finally, you could cover private school tuition for your grandchildren using the education exclusion.

With the holiday season on the horizon, it’s the perfect time to consider how strategic gifting can align your generosity with your family’s needs while preserving your wealth. Whether you’re making a direct gift, helping with tuition, or covering medical expenses, these gifting strategies can be tailored to fit a wide range of family situations and financial goals. By working with a tax advisor, you can ensure that your gifts are implemented effectively, maximizing their financial and personal impact—making this season one of lasting significance for those you care about.