Estate Planning Tools: Gifting

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Introduction:

One way to minimize the cost of your estate is through gifting. A gift is a voluntary transfer of property from a testator to a grantee. Gifts may be a lifetime gift or a deathbed gift. A lifetime gift is made during a testator’s lifetime and may include a simple cash gift or a promise for future interest in a property. Lifetime gifts allow a testator to reduce the size of your estate, and lower estate/inheritance taxes upon death. 

A deathbed gift is a gift given in anticipation of the donor’s imminent death. For example, a father may be diagnosed with terminal cancer and in anticipation of death gives his son all the farm and equipment. For this to be a deathbed gift, the father must die from cancer. If the father does not die, it would not be considered a deathbed gift (for more information see, FS-1056, Property Ownership and Transferring Are Important Features of Your Farm Succession Plan).  

	Lifetime Gift	Deathbed gift
Definition	made during a testator’s lifetime and may include a simple cash gift or a promise for future interest in a property allows a testator to reduce the size of your estate, and lower estate/inheritance taxes upon death	a gift given in anticipation of the donor’s imminent death If X does not die because of imminent health issue (ex. Cancer), it would not be considered a deathbed gift Avoids probate
Example	A farmer gives his daughter full title to a barn and its equipment five years before his death, properly transferring ownership with written documentation and updating property records.  Since this gift was completed during the farmer’s lifetime, the barn and equipment do not pass through probate upon his death. It’s legally the daughter’s property.	Martha is an 82-year-old widow who owns and runs a 300-acre family farm. She’s been hospitalized with late-stage cancer and is not expected to live more than a few days. Her estate plan includes a will, but she hasn’t formally transferred some of her personal farm equipment. On her deathbed, she calls her grandson Luke, and says: “Luke, I want you to have my combine harvester—use it well. The keys are in the top drawer of my desk. If I don’t make it out of here, it’s yours.” Luke takes the keys and begins preparing to use the combine for the next harvest. Martha dies the following day.

Individuals can use part of their Unified Credit to cover the taxes due. The Unified Credit is a tax credit given to every U.S. citizen and resident to use against wealth transfer taxes, either taxable gifts or estate bequests. In 2025, the Unified Credit was $13,990,000 per person; it will be adjusted yearly based on inflation until December 31st, 2025. After that, on January 1st, 2026, the Unified Credit will become $15 million per person and will permanently continue to adjust yearly with inflation. Utilizing this tax now to evade taxes on their gifts reduces the amount that will be available upon death.

Currently, an individual can give up to $19,000 a year, or a couple may gift up to $38,000 to one individual without incurring the federal gift tax. Once you give a gift, however, you cannot get it back – there can be “no strings attached” to a true gift. Any amount in gifts exceeding $19,000 a year to any particular individual is taxed by the federal government at a rate of 40%. Maryland does not impose a state gift tax.

 For example, Jim gives $24,000 per year to each of his five children for ten years running. Because he is giving $5,000 more than the tax-exempt amount of $ 19,000, each individual gift has a tax liability of $5,000 per year. Thus, in total, taxable gifts are $25,000 for each year. Since Jim has been doing this for 10 years, he incurs taxes on $250,000 worth of gifts. By using his Unified Credit against this tax liability, Jim would only have enough Unified Credit remaining to cover $10.95 million estate taxes when he passes, assuming the exempted amount does not increase due to inflation in the 10-year period. See more about making gifts as an estate planning strategy below.

Before making a gift to a third party, you should verify the amount of annual exclusion allowed in any given year. For large estates, gifts can reduce the size of the estate and, therefore, the estate taxes. Gifts of farm property must always be valued at fair market value. If a family knows the farm will be transferred after the death of the owner, one way to reduce estate taxes and achieve other goals is to start the transfer before the owner’s death. You can have the heir and possible new owner buy parts of the farm, land, livestock, or equipment. The ownership of these assets could be transferred with a parent- or current owner-financed mortgage to aid the new farmer. The family could transform the business into an LLC, under which each parent could give each child gifts of $19,000/year of membership units in the LLC or partnership. The family could also set up a corporation with shares or LLC with a membership interest to facilitate the transfer of ownership. Each parent can transfer at least $19,000 worth of shares/membership interest every year without reporting it on a gift tax return and without incurring any gift tax liability. This number will increase each year based on inflation. 

In addition, the value of the membership units gifted can be discounted since the recipient does not control the property and cannot easily sell this minority interest in the family farm. A discount of between 20% and 40% of the value of the gift property may be justified however, the chart below should help gauge what typical discounts may look like.

Discount Type	Typical Discount Range	When does it apply?	Agricultural Example
Minority Interest Discount	10-40%	Gifted interest represents less than 50% ownership (gift limits control rights)	A 30% ownership interest gifted in a family-owned farm LLC, where the recipient cannot make decisions alone.
Lack of Marketability Discount	10-35%	Reduced liquidity of an interest (cannot be easily sold of converted to cash)	Shares in a private farming cooperative that cannot be sold publicly or easily converted to cash.
Blockage Discount	Variable/ Case-by-case basis	When selling a large block of securities could lower the market price if sold all at once	Transferring a large percentage of farmland acreage that would flood the local market and reduce land value.
Control Premium (Negative Discount)	N/A	Opposite of minority interest; a controlling interest may have a premium, not a discount.	Owning 51% of a farm corporation gives control over operations, valued higher than a minority stake.

 More Examples:

For example, George and Abigail Lewis have one son, Henry, who wishes to take over the farm. He begins by purchasing pieces of equipment from his parents. They decide that transferring the farm through shares may be the most straightforward procedure, so they set up a subchapter S corporation with one share for each acre in the farm. George and Abigail retain the bulk of the stock, holding onto their control over the farm. George and Abigail can gift Henry shares equal to $19,000 ($38,000 total) each calendar year without incurring any gift tax liability. If the 500-acre farm has a fair market value of $3.5 million or $7,000 an acre, then George and Abigail can gift Henry shares equal to the value of four acres each year without having to report the gift. The IRS recognizes that shares equal to four acres of the property have less than $30,000 of value because Henry will have little control over decisions about the property and cannot sell his shares easily.

Therefore, George and Abigail may actually give Henry more than four shares each year. As mentioned above, discounts between 20% and 40% of the value can be taken. Henry may be able to receive shares with underlying property valued at $30,000 to $40,000 each calendar year without any gift taxes incurred by his parents. This strategy will require an appraisal of the value of the shares in the business. Even with these higher values, it would take the parents 90 to 120 years to pass on a $3.5 million farm in this fashion, assuming it does not continue to increase in value. 

Key Takeaway: This timing indicates the importance of planning and beginning this process at the earliest date possible.

Other Types of Gifts and Gifting Strategies:

Gifting Strategy	What It Involves	Annual/Lifetime Tax Impact	Avoids Probate?	Maintains Control?	Best For
Annual Exclusion Gifts (Lifetime vs. Deathbed)	Gift up to $19K/year (2025) per recipient	No gift tax or filing if under limit	✅ Yes	❌ No	Simple yearly wealth transfers
Lifetime Exemption Gifts	Use $13.99M lifetime exemption (2025)	Reduces estate exemption	✅ Yes	❌ No	Transferring large assets tax-free
Gift of Ownership in Farm Entity (LLC/Corp)	Gift shares or units in business entity	May use annual/lifetime exemption; valuation discounts apply	✅ Yes	✅ Yes (via control of voting shares)	Gradual farm succession
Gifting Equipment or Livestock	Direct gift of tangible assets	May require valuation; potential tax issues (depreciation)	✅ Yes	❌ No	Transitioning operational assets
Gift of Land with Life Estate Reserved	Gift land but retain use/income	Asset removed from estate if donor survives 3 years	✅ Yes	✅ Yes (life use rights)	Keeping land in family while using it
Trust-Based Gifts (e.g., IDGT, GRAT)	Transfer into irrevocable trust	Complex, but tax-efficient long-term	✅ Yes	✅ Yes (via trust terms)	Protecting assets, controlling use
Tuition/Medical Gifts (Direct Payments)	Pay schools or hospitals directly	Not counted as gifts at all	✅ Yes	❌ No	Supporting heirs without using exemption
Conditional/Buy-Sell Agreement Gifts	Gift with terms for reversion or control	Varies depending on terms	✅ Yes	✅ Often	Keeping farm with committed heirs

Glossary

Annual Exclusion Gift - A gift of up to $19,000 per year (as of 2025) to any one individual without incurring federal gift tax or filing requirements.

Blockage Discount - A valuation discount applied when selling a large quantity of an asset (e.g., land or securities) would flood the market, reducing its value.

Conditional/Buy-Sell Agreement Gift - A gift made with conditions or restrictions, often including terms for reversion or control, to ensure committed heirs retain ownership.

Control Premium - The increase in value for a gifted interest that grants majority control, such as owning over 50% of a corporation or LLC.

Deathbed Gift - A gift made in anticipation of imminent death. Valid only if the donor dies of the condition prompting the gift. Avoids probate.

Fair Market Value - The objective value of an asset, used to determine taxable amount of gifts.

Gift - A voluntary transfer of property from one person (the donor) to another (the recipient) without compensation. Can be lifetime or deathbed.

Gift of Land with Life Estate Reserved - Gifting land while retaining the right to use or receive income from it during one’s lifetime.

Gifting Equipment or Livestock - A direct transfer of tangible farm assets, which may trigger valuation or depreciation-related tax issues.

Gift of Ownership in Farm Entity (LLC/Corp) - Gifting shares or units in a business. May qualify for valuation discounts, such as those for lack of marketability or minority interest.

Lack of Marketability Discount - A valuation discount for gifted assets that cannot be easily sold or converted to cash.

Lifetime Exemption Gift - Gifts that exceed the annual exclusion and use part of the lifetime Unified Credit (e.g., $13.99 million in 2025) to avoid gift tax.

Lifetime Gift - A gift made during the donor's life, which reduces the size of the estate and potentially lowers estate/inheritance taxes.

Minority Interest Discount - A valuation discount for gifted interests representing less than 50% ownership, due to lack of control.

Probate - The legal process of validating a will and distributing assets, which can be avoided through certain gifts.

Trust-Based Gifts (e.g., IDGT, GRAT) - Assets transferred into irrevocable trusts, used for long-term, tax-efficient gifting while maintaining control through trust terms.

Tuition/Medical Gifts (Direct Payments) - Payments made directly to educational or medical institutions, which are not counted as gifts and do not reduce the Unified Credit.

Unified Credit - A federal tax credit that allows individuals to transfer a certain amount of wealth, either as gifts during their lifetime or bequests at death, without incurring federal gift or estate taxes 

References:

Paul Goeringer, Property Ownership and Transferring Are Important Features of Your Farm Succession Plan, Farm Succession Planning (Feb. 28, 2017), https://medium.com/farm-succession-planning/property-ownership-and-transferring-are-important-features-of-your-farm-succession-plan-57a3b086e580.

Valuation of assets | Internal Revenue Service

This work is supported by the Northeast Extension Risk Management project award no. 2024-70027-42540, from the U.S. Department of Agriculture’s National Institute of Food and Agriculture.