By: Robert Moore, OSU Extension

The federal estate tax exemption is set to drop dramatically in 2026—from $13.99 million in 2025 to an estimated $7–$7.5 million per person. For some farm families, this shift could result in significant estate tax exposure. While most estates won’t exceed the new limit, some farmers, especially those with high-value farmland or appreciating assets, will find themselves suddenly at risk of federal estate taxes.
Gifting is one strategy to reduce the size of your taxable estate, but it’s not always simple or risk-free. Let’s explore when gifting can help, when it might not, and what to watch out for.
Two Types of Gifts
There are two main gifting categories under federal law:
- Annual Exclusion Gifts – In 2025, you can gift up to $19,000 per recipient ($38,000 for couples) annually without using any of your lifetime exemption.
- Lifetime Credit Gifts – Larger gifts are allowed, but they reduce your lifetime estate tax exemption. The lifetime estate tax exemption is the amount of wealth that the IRS exempts from estate taxes. The exemption can be used at death, gifted away during life, or a combination of the two.
Example: If a parent gifts a $1,019,000 farm to a child, the first $19,000 is exempt from taxes and does not reduce the parent’s estate tax exemption. The remaining $1,000,000 reduces the parent’s lifetime estate tax exemption from $13.99 million to $12.99 million.
Gifting Strategies That Work
1. Annual Exclusion Gifts
If you’re just slightly over the expected 2026 exemption, annual gifts can move you back under the limit.
Example: A grandparent with 10 grandchildren can gift $190,000 per year. Over 2 years, that’s $380,000—enough to reduce a modest estate and eliminate taxes.
But for high-net-worth individuals, $19,000 per person may be too little to make a significant impact.
2. Lifetime Gifts of Appreciating Assets
Large gifts don’t directly reduce estate tax liability (since they reduce your exemption), but they remove future appreciation from your estate.
Example: If you gift farmland worth $1M that later appreciates to $3M, only $1M is deducted from your estate tax exemption — the $2M in appreciation escapes estate taxation entirely.
Potential Downsides of Gifting
- No Stepped-Up Basis. Gifting assets during life means recipients take your original tax basis, not the stepped-up value at death—potentially increasing future capital gains taxes.
- Loss of Control & Income. You must fully give up ownership and control. Gifting income-producing property could impact your financial security.
- Risk of Financial Mismanagement. If a gifted asset is lost to debt, lawsuits, or divorce, it’s gone. One solution? Use an irrevocable trust to hold the gift—this protects assets while still benefiting your heirs.
Another Strategy: Pay Directly for Education & Medical Expenses
The IRS allows unlimited direct payments of tuition or medical bills without using your exemption. But payments must go straight to the provider, not to the individual.
Example: Grandpa has a $9 million estate and wants to reduce its size before the federal estate tax exemption drops in 2026. He has four grandchildren in college and a daughter who recently underwent surgery.
Grandpa pays the following directly:
- $20,000 in tuition for each grandchild (4 x $20,000 = $80,000) directly to their universities
- $25,000 in hospital bills paid directly to the hospital for his daughter
Total Reduction in Taxable Estate: $105,000
Impact on Exemption: None—these payments do not count against Joe’s $13.99 million estate tax exemption or annual gift limit, because they qualify under the IRS educational and medical exclusions. Grandpa could still give each of those recipients an additional $19,000 under the annual gift exclusion without any tax consequences.
Conclusion: Gift With Caution and Professional Help
Gifting can be an effective estate tax strategy—but only when used thoughtfully and with professional guidance. Consider the loss of stepped-up basis, the asset’s appreciation potential, your own financial needs, and the stability of the recipient. For some, the risks of gifting may outweigh the benefits.
With estate tax rules changing in 2026, now is the time to review your estate plan. Consult your attorney and tax advisor to determine if gifting fits your strategy—and how to do it safely.
For more information on gifting and estate taxes, see the Gifting to Reduce Federal Estate Taxes bulletin available at farmoffice.osu.edu.