Lifetime giving is one of the most satisfying parts of a legacy plan—you get to see the impact of your generosity. It can also be a genuine tax strategy. But gifting has rules, and the wrong gift can cost your family more in capital gains than it ever saves in estate tax. Here's how the pieces fit together.
The Annual Exclusion: The Free Space
The federal annual gift tax exclusion lets you give up to $19,000 per recipient per year (as of 2026) with no tax consequences at all—no gift tax, no return to file, no dent in your lifetime exemption. The per-recipient part is powerful: a married couple with three married children and six grandchildren could move well over $400,000 a year to family, entirely outside the gift tax system.
Two payments don't count against the exclusion at all: tuition paid directly to a school and medical expenses paid directly to a provider. Paying a grandchild's tuition straight to the university is unlimited, on top of any annual exclusion gifts.
The Lifetime Exemption: The Big Umbrella
Gifts above the annual exclusion aren't taxed on the spot—they simply use up part of your lifetime estate and gift tax exemption, which is $15 million per person beginning in 2026 (indexed for inflation). You file a gift tax return to track it, but no tax is due until lifetime gifts plus your estate exceed the exemption. With the exemption this high, very few families will ever owe federal transfer tax—which changes what "smart gifting" means for everyone else.
The Trap: Giving Away Appreciated Assets
Here's the rule that surprises people. Assets you give during life carry over your original cost basis to the recipient. Assets your heirs inherit at death generally receive a stepped-up basis—appreciation during your lifetime is wiped clean for capital gains purposes.
Say you bought lake property for $80,000 that's now worth $480,000. Deed it to your daughter today, and she inherits your $80,000 basis—selling means capital gains tax on $400,000 of appreciation. If she instead inherits it at your death, her basis steps up to market value and that gain disappears. For families with no estate tax exposure, holding appreciated assets and gifting cash is usually the better order of operations.
Michigan Wrinkles
Gifting Michigan real estate has a second cost: the transfer can uncap the property's taxable value, permanently raising its property taxes. Certain transfers to close family can preserve the cap, and tools like Lady Bird deeds defer the transfer until death—capturing the step-up in basis at the same time. Medicaid's five-year look-back is also worth remembering: large gifts can affect long-term care eligibility years later.
Making Gifting Part of the Plan
Good gifting strategy is mostly sequencing: use annual exclusions and direct tuition/medical payments freely, gift cash or high-basis assets rather than appreciated ones, let low-basis assets ride to the step-up, and coordinate real estate moves with your property tax cap and your broader legacy plan. When gifts are large or ongoing, we coordinate with your CPA and financial advisor so the estate plan, the tax return, and the investment strategy all tell the same story.