At Bay Bay Financial Planning & Investments, we talk a lot about growing and protecting wealth. But just as important is what happens after the wealth is built—especially when it’s passed on to the next generation. Part of our practice is learning about your family and understanding what happens to your money when you’re no longer here.
History has no shortage of stories where fortunes were made… only to be squandered by heirs unprepared for the responsibility that comes with wealth. We’ll touch on a few of those stories later.
In this blog, we want to cover some of the basic rules, tools, and things you need to know about leaving money to your heirs.
Key Takeaways:
- Be careful about just joint titling your assets!
- Having the right conversations with your kids or grandkids can yield significant results and planning leverage.
- Education is the most important thing. You can’t give life experience, but you can talk, and you can teach.
Some Basics on Gifting
Before we get too philosophical, let’s cover some basics. The first question I often get asked when talking about gifting is: who owes the tax? In all likelihood, the answer is no one.
In Section 2503(b) of the Internal Revenue Code – Exclusions from Gifts, it is stated:
This section provides the rules for the annual gift tax exclusion, allowing individuals to give up to a certain amount each year per recipient without incurring gift tax or needing to use their lifetime exemption.
Said another way, you can gift anyone, for any reason, up to $19,000 (2025 amount) a year without incurring any tax or, more importantly, needing to disclose such a gift on your or the recipient’s return. If you have a spouse and are making a gift to your son or daughter, the two of you could gift $38,000. Since there are two of you, the amount doubles. No tax, no reporting on your return.
This gift amount applies to goods (cars, boats, etc.), contributions to a 529 plan, or UTMA investment accounts—just any gift below that value.
Some Exclusions
There are some notable exclusions, as well as implications for going past this limit. Under Section 2503(e) of the Code, you can pay for someone else’s medical or education expenses directly. That would mean paying a tuition bill directly to the educational institution. Qualified medical expenses can be a bit more nuanced under Section 213(d), but generally include diagnoses, cure, mitigation, and treatment of disease. Again, as long as these expenses are qualified, you could pay a medical bill directly.
These payments would not count against your annual gift exclusion and would also not require you to amend your return or the recipient’s.
What If I Go Over?
You may have heard of the “estate tax.” What most people don’t know is that gift and estate tax are synonymous. The tax itself is a “transfer tax,” intended to generate revenue on the re-titling of assets transferring ownership. In 2025, each individual has a Unified Credit under Section 2010 of the Internal Revenue Code.
This credit establishes an amount that can be transferred from your name to another non-spouse individual without incurring any tax. However, when claiming some of the credit, you must file a Gift Tax Return (Form 709).
In 2025, the amount of the credit that each individual has is $13.61 million. Remember when I said it was unlikely you’d incur any tax on gifting? This is why. If you are married, your exclusion is double that amount, roughly $27.22 million.
Updated for the One Big Beautiful Bill Act July 2025: Each individual has a credit for $15 million or $30 million per married household.
If you go over the annual exclusion and gifts are NOT directly paid for education or medical bills, you will need to report the gift and claim a portion of your credit in that year. Also worth pointing out: these limits DO NOT apply to gifts from a spouse. The marital exclusion is unlimited.
Bottom Line:
Gift and estate taxes generally aren’t something the majority of the American public needs to worry about. But you do need to make sure you file the appropriate return if you are going to do any type of major gifting.
So, If Taxes Aren’t the Concern, Then What?
I say a lot (stealing Mark Twain’s line): history doesn’t repeat itself, but it does often rhyme. There’s a long list of families who pass along significant wealth to the next generation, only to see it squandered. I read a blog recently that talked about the children of Stuart Mott, one of the founders of General Motors. You can read some of the highlights here, but the son was left with a significant trust and was paid, oh, $850,000 per year from an additional trust. He never worked a day in his life.
You can imagine what happened. If you really want the war stories, read about the former Vanderbilt dynasty.
Most people, on top of never paying gift or estate taxes, will never need to worry about that level of wealth transfer. However, with a decade of above-average equity returns and many retirees not spending down their money, it means frequent transfers of 7-figure sums to non-spouses.
Now or Later?
In reference to the above IRC sections, there really isn’t much advantage or disadvantage, tax-wise, about gifting funds you’ll likely never spend now or upon death.
However, if you are concerned about what may happen to the money, while you’re here, you have influence you can exert. This can come in the form of discretion as to the timing of a gift. Say your child is in need of a new car or is considering buying their first home. It’s an opportune time to be of support.
When a beneficiary receives assets as an inheritance, say from an IRA, there are no strings attached. It is retitled into their name to be used as they see fit. There are rules about how quickly they need to distribute it (not a good thing) that will likely accelerate spending. Of course, you won’t be around to exert any influence or pass words of wisdom on how it should be used either.
Generally speaking, when it fits your financial plan, we encourage lifetime gifting. This establishes real-world experience in making financial decisions with money that wasn’t earned. It also allows for great conversations between generations on expectations and education on what not to do.
Tools at Your Disposal
Most of what we’ve talked about so far is in reference to outright lifetime gifting. Here are some tools to help with whatever you need.
What About Investment Accounts? I Get Asked About This Often.
Education Funding – Section 529 Plans
The first place I point to is what is called a Section 529 plan, named for the section it appears in the Internal Revenue Code. These were created as a way for parents or grandparents to save for qualified education expenses.
First, 529 plans are administered by each state. So, if you look up Delaware 529, you’ll notice they use Fidelity as a custodian. Maryland uses a more local option, T. Rowe Price. Each plan will have dedicated investment options, and if you are a resident of that state, it may include a state tax deduction. Morningstar does a great job annually of rating each of these plans.
Sometimes, depending on the fees in the plan, it may be worth selecting an out-of-state plan instead of one with higher tax rates. As we’ve pointed out before, costs can have a significant impact on the outcome of your investments.
Your contributions into the plan may have a state tax deduction (over 30 states have it), but there is no federal tax deduction. Growth in the plan is tax-deferred, and most importantly, tax-free withdrawals when used to reimburse qualified education expenses. This is the leverage in the plan.
Qualified education expenses would fall into the following:
- $10,000 per year for K-12 tuition
- Tuition and expenses (including trade & vocational schools!)
- Room and board
- Books and supplies
- Computers and technology
- Special needs services
- $10,000 for student loan repayment
The gifting limit into a plan initially falls under the annual exclusion. 529 plans have a unique “super contribution” feature, where 5 years of exclusions can be made at once.
In 2025, this means:
- One person could give $19,000 x 5 = $95,000 per donor for a beneficiary.
- Or, for a married couple, $95,000 x 2 = $190,000 per couple for a beneficiary.
That’s a sizable amount to be put away for college. States do have limits on what can be contributed to a 529, so if this were your savvy method of sheltering millions, the cap on contributions will be limited.
Despite the fact that you will open a 529 in your name with a beneficiary, this is a completed gift. Can you change the beneficiary of a 529? Yes. However, you may need to file a gift tax return depending on the amount, as this would represent a new gift. This would fall under the same exclusion rules and gift tax limitations as above.
Ok, But I Don’t Want It to Be Locked In for Just Education
A common concern that I hear. There are a few outs:
- Worst-case scenario, you’ll pay ordinary income tax and a 10% penalty on the earnings portion of the 529 if funds were not used for a qualified education expense.
- You can change the beneficiary to a younger child, but gift tax rules will apply.
- You can use up to $35,000 to contribute to a Roth IRA for the beneficiary. This will be in the form of annual contributions (e.g., $7,000 per year for 5 years).
- $10,000 as a qualified withdrawal for student loan repayment.
The ubiquity of a 529 plan is hard to beat, especially considering the tax benefits that will accrue from potentially tax-free growth over a child’s lifetime. It does become a pseudo-Roth IRA, and in fact, a portion can become a Roth IRA!
On estate planning: unless the owner is also the beneficiary, 529 plans are generally not included in a taxable estate. This makes it a great estate planning tool! If a major 5-year contribution was put into the plan, it can be pulled back in if death occurs within 5 years. As an owner of the plan, you’ll name a successor owner who will take over custodial responsibilities of the account.
Bottom Line
It’s hard to argue against the merits of a 529 plan. We recommend various different plans depending on needs, state, and preference. We also use Schwab’s 529, which has some flexibility in terms of investment choices.
We’ll continue with Part 2 of gifting, where we’ll touch on UTMA accounts, kiddie tax, and thinking about beneficiaries and joint titling. Stay tuned!
