NEWS & INSIGHTS

When it comes to estate planning, one of the most important decisions that you will make is how and when to transfer your assets. Two common strategies include making gifts during your lifetime (“Lifetime Gifts”) and gifting assets at death (“Testamentary Gifts”). 

While both methods involve giving assets to loved ones, or charities if you are philanthropically inclined, each carries distinct legal and tax implications. A better understanding of these differences will help you make more informed decisions that align with your financial goals and your family’s needs.

What Is a Lifetime Gift?

A Lifetime Gift is exactly what it sounds like: a transfer of an asset from one person to another during the donor’s lifetime. 

Example:  A parent gives cash to their adult child to help make a downpayment on a new home.

What are the benefits of Lifetime Gifts?

• Allows the donor to see the impact of their gift.
• May reduce the size of the donor’s taxable estate.
• Recipient receives the financial benefit of the gift sooner rather than later.

What are the tax implications associated with Lifetime Gifts?

• Annual Gift Tax Exclusion.  In 2025, an individual may gift up to $19,000 per recipient without using their Lifetime Exemption.   
• Lifetime Gift and Estate Tax Exemption.  Gifts above the annual exclusion reduce the donor’s Lifetime Gift and Estate Tax Exemption, which is $13.99 million per individual in 2025.
• Reporting Requirements.  Gifts above the annual exclusion must be reported on IRS Form 709.  A gift tax return (IRS Form 709) is due on the same date as your federal income tax return, meaning a gift tax return for a gift made in 2025 will be due on April 15, 2026. 
• Cost Basis.  The recipient of a Lifetime Gift assumes the donor’s tax basis, which may lead to capital gains taxes if the gifted asset is subsequently sold.

*CAVEAT:  Gifting assets may affect eligibility for Medicaid if you or your spouse needs long-term care services within five years of making the gift.

What Is a Testamentary Gift?

A Testamentary Gift is a gift that is made through a person’s will or trust that takes effect at the donor’s death. 

What are the benefits of Testamentary Gifts?

• Allows the donor full use of assets during their lifetime.
• May be structured to provide tax efficiency through trusts or charitable donations.
• May be adjusted during the donor’s life by updating their estate planning documents.

What are the tax implications associated with Testamentary Gifts?

• Estate Tax.  Testamentary gifts may be subject to federal estate tax if the total estate exceeds the lifetime exemption amount. However, estates below this threshold pass tax-free at the federal level.
• Pennsylvania Inheritance Tax.  Depending on the donor’s relationship with the recipient, Testamentary Gifts may be subject to Pennsylvania inheritance tax.  For example, the inheritance tax rate for a transfer between spouses is 0%; a transfer between a parent and child is 4.5%; a transfer between siblings is 12%; and a transfer between cousins, unmarried couples or unrelated persons is 15%. 
• Step-Up in Basis:  Assets inherited at death generally receive a step-up in cost basis to the fair market value as of the date of death, which may reduce or eliminate capital gains tax on pre-death appreciation if the recipient subsequently sells the asset. However, some assets do not receive a step-up in cost basis, such as 401(k)s and IRAs. 

Which Strategy Is Right for You?

Deciding between Lifetime Gifts and Testamentary Gifts depends on a number of factors, including:

• Your current financial needs and goals
• The size of your estate
• The financial needs and maturity of your beneficiaries
• Whether you are philanthropically inclined

Final Thoughts

Lifetime Gifts and Testamentary Gifts can be powerful estate planning tools, but careful planning is essential to avoid unnecessary tax consequences and to ensure your estate planning goals are achieved. Working with a qualified estate planning attorney and financial advisor can help you choose the best approach for your specific situation.

Ed Twomey is a Partner in the Estates and Trusts team and leads the Elder Law team at The Lynch Law Group.  Please contact him via our contact form or by phone at 724-776-8000 with any questions or for more information related to lifetime gifts, testamentary gifts or other estate planning matters.