The current federal gift and estate tax rate is 40% and once an individual uses his or her lifetime exemption (currently $11.58 million and scheduled to drop to about half of that in 2026, perhaps sooner in light of election results) tax planning becomes difficult and complex. The only simple solutions are making charitable gifts and using the annual gift tax exclusion that allows an individual to make gifts of $15,000 per year to as many people as desired, provided there are no strings attached to the gift.  For people with large estates, this well-known annual exclusion is an important, albeit modest, tool to whittle away at their taxable estates while providing support or a small windfall to family and friends.

But there is another—often overlooked—strategy for reducing a taxable estate. Internal Revenue Code Section 2503(e) excludes the direct payment of another’s medical and educational expenses from federal gift tax.  Importantly, that direct payment is similarly excluded from another transfer tax designed to prevent high-net worth individuals from skipping over generations in an effort to reduce estate taxes, known as the generation-skipping transfer, or GST, tax.  Grandparents can therefore take advantage of the IRC 2503(e) exclusion for the benefit of their children, grandchild and even great-grandchildren without giving rise to federal estate or GST tax.


%d bloggers like this: