Make the Most of Your Gifting Strategy to Support Loved Ones and Reduce Taxes

Financial gifts can be life-changing for loved ones—helping them buy a home, go to college or even pay for advanced medical treatments. And unlike an inheritance, gifts made during your lifetime let you see the fruits of your generosity. What’s more, making high-value gifts during your lifetime can reduce your family’s exposure to estate tax after your death. However, those gifts can incur their own taxes if not handled carefully.

If you’re in the position to make significant gifts, you probably know that the IRS may collect gift tax on non-charitable contributions. But even if you understand the basics of how wealth transfer taxes work, you may not be aware of some advanced gifting strategies that can help you and your heirs reduce taxes.

What is the gift tax?

First, here’s a quick refresher on the basics. Then we’ll dive into more advanced gifting strategies.

Gifts of significant value (whether cash, securities, property or other assets) are taxed on the giver (not the receiver) because Congress recognizes gifts as a way for people to reduce their estate tax at death. For example, with no gift tax, a billionaire with a terminal illness could give all her money and property to her children a week before dying and then owe nothing in federal estate tax upon her death.

To prevent such scenarios, Congress created a unified gift and estate tax—meaning these taxes carry the same marginal rate (40 percent) and the same exemption. In 2026, the exemption for each tax is $15 million per person, or $30 million for a married couple. (Note that both exemptions are permanent, barring any new law passed by Congress, and adjusted annually for inflation.) The gift tax exemption is cumulative over a lifetime and doesn’t include charitable contributions that are already tax-exempt or immediate gifts to your spouse. But as we’ll see, you can actually give much more than that without paying gift tax while reducing your estate value considerably.

The power of the gift tax exclusion

A key element of the law is the gift tax exclusion, which allows you to gift certain amounts every year that don’t count toward your lifetime $15 million exemption. In 2026, the law excludes gifts up to $19,000 made to any individual. There is no limit on the number of people to whom you can give $19,000 during the year.

Here’s how the exclusion might work. Say you and your spouse have two married children and four grandchildren. In one year, you could each give $19,000 to each of your two children, their spouses, and your grandchildren. That’s a total of $304,000 ($19,000 x 2 donors x 8 recipients).

Over 20 years, you and your spouse will have removed more than $6 million from your joint taxable estate—not counting inflation adjustments to the exclusion itself, and potential earnings if the funds are invested. And you still will not have touched your lifetime gift exemption of $15 million each.

Paying education and medical expenses directly

Beyond the annual gift tax exclusion, you can also exclude medical and tuition expenses you pay on behalf of other people—not just family members. The key here is that you must pay the provider directly; funds paid or reimbursed to the patient or student would fall under the regular gift tax exclusion.

Medical payments can include health insurance premiums as well as treatments and prescription drugs. Qualifying education expenses are generally limited to tuition from kindergarten through college.

Super-funding a 529 plan

Tax-advantaged educational savings plans, known as 529 plans, can be “super-funded” with five years’ worth of gift tax exclusions in the same year. In 2026, that adds up to $95,000 (5 x $19,000) or $190,000 from two donors. If you take this approach, you will use your gift tax exclusion for that recipient for five years, after which you can super-fund again. Meanwhile, any growth in the account will occur tax-free.

Super-funding is often appealing to grandparents who wish to quickly reduce the size of their estate. From the beneficiary’s standpoint, tax changes in 2025 have dramatically increased the types of eligible withdrawals from a 529 account. The accounts now offer greater ability to pay for early education, trade schools and lifelong learning.

Gifting through trusts and partnerships

Given the current exemptions, only very-high-net-worth individuals will end up paying estate or gift tax. That said, some of the more advanced gifting strategies can reap other tax benefits for you, your spouse and your heirs while ensuring that your gifts are being used as you intend. In many cases, they also shield assets from creditors.

Your advisor and estate attorney can provide more information on gifting strategies, including these:

• Grantor retained annuity trust (GRAT). A GRAT is an irrevocable trust (meaning it can’t ever be changed) that you fund with high-growth-potential assets like stocks. You then set up a fixed annual payment from the trust to yourself until you have received payments equaling the original value of the assets plus interest. Then any remaining funds pass to beneficiaries. GRATs are typically more advantageous when interest rates are low.
• Crummey trust. An irrevocable trust, a Crummey trust can be useful when you seek to control how your heirs use annual gifts. Say you create a trust for your adult child and in the first year fund it with $19,000—the gift tax exclusion limit for any individual gift. The trust provides a brief window during which your child can withdraw the funds—generally 30 to 60 days. This provision qualifies the trust as a present (not future) gift, which is essential to meeting the gift tax exclusion rules. After the withdrawal window closes, the trust assets cannot be touched until after your death.
• Qualified personal residence trust (QPRT). A QPRT is a type of irrevocable trust in which you transfer ownership of your home to beneficiaries. You can live rent-free in the home for a specified term, after which you must pay fair-market rent to your heirs. The trust removes the home from your taxable estate and potentially reduces your gift tax exposure. But if you die before the end of your rent-free term, the home reverts to your estate.
• Spousal lifetime access trust (SLAT). This irrevocable trust removes assets you own individually (up to your lifetime gift exemption) from your taxable estate by granting them to your spouse and other family members, who can then receive tax-free distributions. Upon your spouse’s death (whether before or after yours), the trust passes tax-free to your heirs. Note that as the donor spouse, you lose personal access to the funds forever. Should a married couple want to set up SLATs for each other, the terms must have what the IRS calls “meaningful differences” to avoid the appearance that each spouse is basically giving him- or herself a trust. For example, they might have different distribution terms and timing or be funded with different types of assets.
• Family limited partnership (FLP). An FLP is like a business partnership, except the business is the family wealth, and the shareholders are multiple generations of the family. Typically, senior family members (say, you and your spouse) are general partners with responsibility for all financial decisions. Children and grandchildren would be limited partners, with shares (and profits) funded from your annual gift tax exclusion—but with no control over the partnership itself. Over time, wealth and control in the FLP gradually shifts to younger generations while shielding the assets from estate tax.
• Irrevocable life insurance trust (ILIT). This type of trust is funded with life insurance policies for your beneficiaries, putting the death benefit outside of your taxable estate. Moreover, you can pay the premiums out of your annual gift tax exclusion. But you lose the ability to cancel the policy or borrow against it.

Keep charitable giving in mind

It goes without saying that charitable giving can reduce estate tax liability, albeit removing those assets from your family inheritance. Less well known are strategies that combine charitable and family gifts, with potential advantages all around.

• Charitable lead trust (CLT). A CLT is an irrevocable trust in which funds gifted by you are paid out monthly to a charity for a specified term. After the term, remaining funds and appreciation go to the non-charitable beneficiary, which could be you or your heirs. The trust can be a vehicle to reduce estate and gift tax, with the added benefit of an income tax deduction for the charitable distributions—either to you (immediately for the entire term of the trust) or to the trust itself against the annual distributions, depending on how it's set up. Either way, investment gains within the trust are taxable.
• Charitable remainder trust (CRT). A CRT is the opposite of a CLT, meaning the trust initially makes monthly payments to non-charitable beneficiaries for a set term, after which the remainder passes to a designated charity.

Finding the sweet spot between gift and estate taxes

Deciding how much to gift and how much to leave in your estate is a balancing act. For example, when you make gifts during your lifetime of appreciating assets like stocks or real estate to your heirs, you’ll pay no capital gains tax on the transfer. But down the line, should your heirs ever sell those assets, they’ll owe tax on the appreciation—and not just on the value at the time of the gift transfer, but going way back (possibly decades) to your original purchase price.

On the other hand, if your beneficiaries inherit those same assets as part of your estate, they would only owe tax (should they sell) on the appreciated value after your death. But that advantage could be wiped out if your assets are large enough to qualify for estate tax.

There is no single right strategy when it comes to estate planning: Every family’s situation is different. Your Northwestern Mutual advisor can help you develop a plan that strikes the right balance and maximizes the power of your legacy.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.