Jeff and Holly visit their financial professional and discuss their goals. Their financial professional explains that Jeff and Holly should continue giving “annual exclusion gifts” of $19,000 (2025) a year to each of their children and grandchildren. This type of gift renews each year and doesn't require any reporting to the IRS. For many clients this type of giving is enough.

For Jeff and Holly, however, their financial professional recommends further giving that is not limited to the annual exclusion amounts. While helpful, the annual exclusions will not prevent the estate from growing. The advisor recommends making very large (for example $2,000,000 per year for four years) gifts that will use part of their lifetime giving exemptions, $13,990,000 each (2025). While reportable on a gift tax return, the use of the exemption means that the clients will not pay gift tax for the transfers since they have more exemption remaining than the size of the proposed gifts. By giving significantly, a large portion of projected growth in value will take place outside of their personal holdings, which will reduce the amount of estate tax their heirs might face.

Their financial professional also explains that one of the pitfalls of gifting directly to their children and grandchildren is that the gifts might be spent frivolously or might be subject to their kids' future potential creditors¹. Therefore, the advisor suggests that instead of giving to the children directly, Jeff and Holly can create an irrevocable trust and make the gifts to that trust. An irrevocable trust can provide instructions to a trustee as to how Jeff and Holly would like the money distributed to their children and grandchildren as well as help protect these gifts from any of their future potential creditors. They can choose to create one trust, with separate shares for each beneficiary, or to create a separate trust for each child and grandchild. In short, Jeff and Holly can make the gifts they desire and set up controls to prevent their children and grandchildren from spending foolishly while providing creditor protection. Jeff and Holly should discuss this strategy with the attorney drafting the trust to help ensure the trust includes language that specifies the procedures the trustee must follow to qualify the gifts made as annual gifting.

As part of their overall strategy, Jeff and Holly would like the trust to apply the money given to a large life insurance policy insuring their joint lives. The trustee agrees and with the assistance of the financial professional will apply for and own a policy to provide an income tax free death benefit when they are both gone. Based on instructions in the trust, the trustee intends to use the policy proceeds first to assist Jeff and Holly’s executor with any liquidity issues that arise from the expected estate tax and then to manage and distribute money to Jeff and Holly’s heirs over time.