Making Gifts - That Aren’t Subject to Gift Tax - Saunders

As an estate planning attorney, I’m often asked a simple question with a very complicated answer: “How much can I give away without paying gift tax?” The good news is that the tax law gives us several powerful pathways for making nontaxable gifts—if we understand and follow the rules.

These rules matter because every dollar you can transfer out of your estate tax‑free today can reduce future estate tax exposure and shift investment growth to younger generations. Using the strategies discussed below, it is entirely realistic for a committed grantor to move well into seven figures—often several million dollars of economic value—to or for a minor over 18 years, all without federal gift tax.

Making Gifts - That Aren’t Subject to Gift Tax

In this post, I’ll walk through:

The federal annual exclusion for gifts
Common “vehicles” for making nontaxable gifts (UTMA, 529 plans, certain trusts)
Direct payment strategies that bypass the gift tax rules entirely
The new opportunity: rolling unused 529 funds into a beneficiary’s Roth IRA
What these tools can add up to over an 18‑year childhood

Annual Exclusion Gifts: Your First Line of Defense

Federal gift tax law allows you to make gifts each calendar year, to as many people as you like, up to the annual exclusion amount per recipient, without gift tax, without using your lifetime basic exclusion amount, and without any allocation of GST exemption. In 2026, that annual exclusion is $19,000 per donee; if you are married and elect to “split” gifts with your spouse, you can effectively double that amount to $38,000 per recipient.

To qualify for the annual exclusion, the gift must be a present interest—meaning the recipient has an unrestricted right to the immediate use, possession, or enjoyment of the property or its income. Outright gifts of cash or marketable securities typically qualify; gifts of “future interests,” such as remainder interests or highly restricted family business interests, often do not.

Over an 18‑year period, a single grantor who fully uses the annual exclusion for one child can transfer roughly $342,000 in present‑interest gifts; a married couple who splits gifts can move about $684,000, all outside the gift tax system. Done correctly, those annual exclusion gifts can also accomplish valuable income tax “shifting,” by moving income‑producing or appreciated assets to family members in lower income or capital gains brackets.

Common Vehicles for Nontaxable Gifts

While a simple check works, clients frequently want more structure or control around gifts. The tax law recognizes several vehicles through which annual‑exclusion and other nontaxable gifts can be made.

UTMA Accounts (Custodial Accounts for Minors)

Most states have adopted the Uniform Transfers to Minors Act (UTMA), which allows an adult custodian to hold property for a minor until a specified age, usually 21. A transfer to a UTMA account is treated as a completed gift, and, up to the annual exclusion amount, it normally qualifies as a present‑interest gift for gift tax and GST tax purposes.

Key features include:

The custodian may use the property for the minor’s benefit during minority without regard to the custodian’s own support obligation.
When the child reaches the statutory age, the remaining custodial property must be distributed outright to the child; if the child dies earlier, the property passes to the child’s estate.

One important caveat: if the donor also serves as custodian and dies while the custodianship is still in place, the value of the custodial property will generally be included in the donor‑custodian’s taxable estate.

529 College Savings Plans

Contributions to a 529 plan are one of the most flexible ways to make nontaxable gifts for education. A 529 plan is a state‑sponsored qualified tuition program that allows contributions for a designated beneficiary, with tax‑favored treatment on investment growth when used for “qualified higher education expenses.”

Qualified expenses include tuition, fees, books, supplies, certain equipment (such as computers and related services), and room and board for eligible post‑secondary programs. Recent legislation expanded that concept to include substantial amounts annually for certain elementary and secondary education costs, including curriculum materials, tutoring, online learning platforms, educational therapies for disabled students, standardized test fees, and dual‑enrollment tuition.

From a gift‑tax standpoint:

All contributions are treated as completed gifts to the beneficiary (even though the account owner retains control) and qualify for the annual exclusion and as nontaxable GST‑exempt gifts.
You may elect to “front‑load” contributions in excess of the annual exclusion by treating a single large contribution as made ratably over a five‑year period for gift tax purposes.
Contributions can be “split” between spouses, effectively doubling the planning leverage.

Generally, the value of the 529 account is excluded from the account owner’s gross estate, even though the owner can change beneficiaries and make limited investment choices. Distributions not used for qualified education are partially taxable and subject to a 10 penalty, with tax imposed on the distributee (beneficiary or owner), but this is often manageable with careful planning.

Given 18 years of funding, including possible five‑year front‑load elections, it is realistic for a family to accumulate a high‑six‑figure 529 balance for a single child, all within the annual exclusion framework.

Section 2503(c) Trusts for Minors

A Section 2503(c) trust is a special type of trust for beneficiaries under age 21 that allows gifts in trust to qualify as present‑interest gifts eligible for the annual exclusion. To qualify:

The property and income must be available for distribution for the beneficiary’s benefit before age 21.
The trustee’s discretion to distribute cannot be subject to a “substantial restriction” (broad standards like “welfare” or “happiness” are acceptable).
Any property not expended must pass to the beneficiary at age 21 or be subject to a general power of appointment in the beneficiary if the beneficiary dies before 21.

Transfers within the annual exclusion amount qualify for both the gift tax and GST tax annual exclusions, but the trust property is included in the beneficiary’s estate at death, and may be included in the donor’s estate if the donor serves as trustee with broad discretionary powers.

Crummey Trusts

Crummey trusts use carefully drafted withdrawal rights to convert what would otherwise be future‑interest gifts into present‑interest gifts that qualify for the annual exclusion. Each beneficiary receives a limited right (typically for 30–90 days) to withdraw all or a portion of each contribution to the trust.

Key design considerations include:

Limiting withdrawal rights to the greater of $5,000 or 5 of trust assets to avoid adverse “lapse” consequences for the beneficiary’s own estate; or using larger withdrawal rights paired with “hanging powers” so that lapses never exceed those thresholds in any year.
Providing notice and a reasonable period for beneficiaries to exercise their rights; IRS rulings have approved 30–90-day withdrawal periods, and case law has focused on the legal enforceability of the right rather than actual exercise.
Avoiding trust provisions that make withdrawal rights illusory or effectively unenforceable, the IRS has denied annual exclusion treatment when beneficiaries are barred from going to court or would be penalized for attempting to enforce their rights.

Crummey trusts can also be used in GST planning, but the GST annual exclusion is much more narrowly available when the trust has multiple beneficiaries or is drafted to avoid inclusion in any beneficiary’s estate, requiring careful GST exemption allocation.

Direct Payments That Bypass Gift Tax Entirely

Some of the most powerful “gifts” for tax purposes are never treated as gifts at all.

Section 2503(e): Direct Tuition and Medical Payments

Under Section 2503(e), payments made directly to an educational organization for tuition, or to a medical provider for qualifying medical care, are completely excluded from the gift tax rules—no annual exclusion usage, no reporting, and no GST allocation required.

Important points:

There is no dollar limit on qualifying 2503(e) payments; they can be unlimited in amount and still avoid both gift and GST tax.
The payment must be made directly to the school or provider; reimbursing a child for tuition or medical costs does not qualify and would instead be treated as a normal gift.

Over an 18‑year period, a high‑net‑worth family can easily pay several hundred thousand dollars or more of private K‑12, undergraduate, and even graduate tuition for a child through 2503(e), all outside the gift tax system and in addition to annual‑exclusion‑based planning.

You can combine 2503(e) payments with other techniques. For example, a grandparent might pay a grandchild’s tuition directly under 2503(e) while also making annual exclusion gifts to a 529 plan to cover non‑tuition expenses.^[18]

The New Opportunity: 529 Plan Rollovers to Roth IRAs

A particularly exciting development is the ability of a 529 beneficiary to roll over certain unused 529 funds into a Roth IRA in the beneficiary’s name, without income tax or penalties, if specific conditions are met. This rule, enacted as part of the SECURE 2.0 Act, turns overfunded college accounts into a long‑term tax‑free retirement asset for the next generation.

To qualify for tax‑free rollover treatment:

The 529 account must have been maintained for at least 15 years.
The rolled amount cannot exceed the aggregate contributions and related earnings made more than five years before the rollover date.
The rollover must be completed via a direct trustee‑to‑trustee transfer.
The amount rolled over in a given year cannot exceed the annual Roth IRA contribution limit, and total lifetime rollovers from that 529 to the beneficiary’s Roth IRA are capped at $35,000.

From an estate planning perspective, this means:

Parents and grandparents can be more comfortable making aggressive 529 contributions, knowing that unused funds may later be redirected into a tax‑free retirement account for the beneficiary.
Large 529 contributions—structured as annual exclusion gifts or five‑year front‑loaded gifts—can remove value from the donor’s estate, grow income tax‑free, and ultimately convert to Roth IRA dollars that are also tax‑free to the beneficiary in retirement.

The rollover itself is not treated as a new gift from the original 529 donor; once the gift is made into the 529, and the conditions are met, the beneficiary’s ability to shift a portion into a Roth IRA is a further tax benefit layered on top of an already effective wealth transfer.

Using All These Techniques Over 18 Years: What’s the Total?

When you combine:

Roughly $342,000 (single grantor) or $684,000 (married, split‑gift) of annual‑exclusion transfers over 18 years to/for one minor, using a mix of 529, UTMA, 2503(c), and Crummey trust contributions;
A high‑six‑figure 529 funding strategy that can cover education and ultimately feed up to 35,000 into a Roth IRA for the child;^[18]
Unlimited direct 2503(e) tuition and medical payments, which, for private schooling and college alone, can easily reach several hundred thousand dollars or more;^[18]

You can realistically move well over $1 million, and in many cases several million, of economic value out of the grantor’s estate for the benefit of a single child over 18 years, with no federal gift tax.

The exact ceiling for a particular family will depend on:

Whether one or two grantors are making gifts
How aggressively they use front‑loading to 529s
How expensive the child’s education and health‑care track is
How the annual exclusion amount inflates over time

But the core takeaway for clients is straightforward: by stacking annual‑exclusion transfers, 529 plans (plus Roth rollovers), trust structures, custodial accounts, and 2503(e) tuition and medical payments, a thoughtfully designed plan can transfer a multi‑million‑dollar package of education, healthcare, retirement funding, and protected capital to a child from birth to adulthood—without triggering gift tax.

For families with significant wealth, that makes these nontaxable gift strategies some of the most powerful tools in the estate planning toolkit.

If you are considering designing a gifting strategy as part of your estate planning strategy, consult with a Texas estate planning attorney like Michael A. Weaver at Saunders | Walsh to ensure compliance and avoid costly mistakes.

Business & Litigation Law Firm McKinney, Texas

[email protected]

(214) 919-3555

Making Gifts – That Aren’t Subject to Gift Tax

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