Your Tax-Smart Holiday Gift Guide to Strengthen Your Estate Plan

The holiday season is a time for joy, gratitude, and the spirit of giving. For those focused on long-term financial benefits for themselves and their loved ones, the holidays also present unique gift-giving opportunities. When done correctly, there are many types of gifts that provide substantial benefits to both the donor and the recipient. In this legal blog post, we explore how you can spread holiday cheer while aligning with your estate planning goals.

1. Gifts Towards Education Funds

What better gift than giving someone you love the gift of education? Contributing to a child or grandchild’s 529 account or other education fund is a thoughtful way to invest in their future. These contributions grow tax-deferred, and withdrawals for qualified educational expenses are completely tax-free. Recent updates to 529 plans provide even more benefits, which allow for or any unused assets in a 529 account to be rolled over into a Roth IRA in the beneficiary’s name without any tax implications or plan penalties in an amount up to $35,000. While it may be difficult to avoid the “fun” gifts such as a toy or new clothes, a contribution to an education fund will continue giving for years to come. For example, just a simple $50 contribution today could potentially grow to $200 after 20 years (assuming an annual rate of return of 7.5% with the help of compound interest). For our full legal blog post outlining education savings plans and how Trusts can be used as a supplemental tool, click here.

When it comes to estate planning, these types of gifts can also be advantageous to you and your spouse. You can gift up to the annual federal gift tax exclusion limit of $18,000 per recipient in 2024 (or $36,000 for married couples) without incurring gift taxes. This threshold is scheduled to increase in 2025 to $19,000 per individual and $38,000 for married couples. While there is no gift tax in Massachusetts, there is an estate tax that my be applicable when you pass. Gifting is an essential strategy that individuals and married couples can leverage to decrease their taxable estate for estate tax purposes. Money paid as a gift is no longer considered a part of the donor’s estate and thus does not count towards the Massachusetts estate tax exemption of $2 million or the federal exemption which is $13.61 million in 2024. As a result, gifting money towards the education savings account of your loved one provides tremendous benefits to both you and the recipient.

2. Charitable Contributions

The holidays are the perfect time to donate to causes and organizations that we support and to members of our community in need. Giving to a charity is not only a heartwarming act but also provides potential tax advantages. Under 26 U.S. Code §170 of the United States Tax Code, any charitable contribution is allowed as an itemized deduction on your tax return, which reduces taxable income. Per the IRS, you can deduct up to 60% of your adjusted gross income (AGI) for cash donations made to charities, and individuals that meet certain conditions can deduct qualified contributions made to charitable organization of up to 100% of their AGI. Not only will this type of gift help you save on your annual tax return, but it gives you an avenue to support causes close to your heart. For large gifts, consider establishing a donor-advised fund for more structured giving, or meet with an experienced estate planning attorney, such as those at Lane, Lane & Kelly, to create a Charitable Trust to streamline the distribution of your assets in the most tax-efficient manner. These types of charitable gifts also help to pay down your total taxable estate as mentioned above, to potentially eliminate or significantly reduce any Massachusetts or Federal estate tax due upon your death.

3. Investing in Your Retirement

Sometimes, the best gift you can give is to yourself. This holiday season, gift yourself a brighter future by making an additional contribution to your retirement account. Investing in traditional retirement accounts, such as an IRA or Roth IRA, offers both immediate tax benefits and long term-estate planning advantages. With a traditional IRA, any contributions that you make are tax-deductible in the year in which they are made, reducing your taxable income, while growth is tax-deferred until withdrawals begin in retirement.

A Roth IRA, on the other hand, offers tax-free growth and tax-free withdrawals in retirement, as contributions are made with after-tax dollars. Keep in mind that traditional IRAs are not subject to income limitations, while Roth IRAs have strict income limitations that must be met in order to contribute. To contribute to a Roth IRA in 2024, an individual filing a single return must have AGI under $146,000, and a married couple filing jointly must have AGI under $230,000. In 2025, these income restrictions are increasing to $150,000 for single filers, and $236,000 for those filing jointly. It is especially beneficial to contribute to your retirement accounts before the end of the year if you have yet to hit the annual contribution limit, which is $7,000 per year for individuals under 50 and $8,000 for those aged 50 or older in 2024. The contribution limits are the same for both a traditional IRA and Roth IRA, and contribution limits are scheduled to stay the same in 2025.

These types of retirement accounts also offer significant estate planning benefits. For each of your retirement accounts you can designate what is called a pay-on-death beneficiary. This allows you to select a beneficiary that will receive your account assets immediately upon your death. This is significant because it ensures a direct transfer of assets upon your passing without the need for probate. Probate is only necessary if you die with assets titled in your individual name. Avoiding probate is highly advantageous as it eliminates potential delays, the need for court approval to transfer or sell assets, along with legal fees and estate expenses. For a full overview of the benefits to creating a Will and Trust in Massachusetts to avoid probate and keep your matters completely private, read our full legal blog post here.

This year, don’t be afraid to put yourself first and make an impactful gift towards your future. Proper planning with these accounts can help maximize your legacy while offering significant tax advantages during your lifetime.

4. Gifting Real Estate

Before you consider gifting your real estate during your lifetime, there are several considerations you should review with a qualified real estate attorney and tax specialist. While it is a very generous offer to gift real estate to your child or another loved one, doing so will have significant tax repercussions. Namely, gifting property at its current value means your children inherit your original cost basis, not a stepped-up cost basis. For example, if you purchased your house years ago for $250,000 but it is currently valued at $600,000 and you decide to gift it to your child, they will inherit your $250,000 cost basis. Meaning when your child goes to sell the property, they will owe significant capital gains tax on the transaction and will have to report a gain of $350,000 on their tax return. You should strongly consider alternatives such as putting your property into a Revocable Living Trust and naming your child as a beneficiary. For a full overview of the stepped-up tax basis and the best ways to approach the transfer of real estate ownership, read our full legal blog post here.

5. Creating or Updating Your Estate Plan

A gift doesn’t always have to be material. One of the most impactful "gifts" you can give your family is peace of mind through a well-prepared estate plan. Use this season as an opportunity to review or create your Will, Trust(s), and Healthcare Directives with the expert assistance of an attorney at Lane, Lane & Kelly. Ensuring that your wishes are clear protects your loved ones from future uncertainty and gives them a roadmap to carrying out your estate in the exact manner that you intended. For more reasons why finalizing or updating your estate plan should be your number one new year’s resolution for 2025, read our full legal blog post here.

Happy Holidays and Happy Gifting!

This holiday season, think beyond traditional presents and explore gifts that align with your long-term goals and values. Whether it’s a financial investment in a loved one’s future, supporting a charitable cause, or ensuring your own financial security, these actions embody the true spirit of giving. If you are truly focused on securing long-term financial freedom for both yourself and your loved ones, this holiday season give a gift that will benefit you for years to come. Please contact us to get started with your estate planning and financial journey today!

From the entire team at Lane, Lane & Kelly, we wish you and your family a wonderful holiday season and a happy and healthy new year!

This blog is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By reading this blog you understand that there is no attorney client relationship between you and Lane, Lane & Kelly, LLP.

Please be advised that nothing in this article is intended to be used as specific tax advice. Lane, Lane & Kelly, LLP is not a certified Tax Specialist. For specific questions, please contact a qualified tax expert or accountant. The information in this article is intended for educational purposes only.