Leveraging Annual Exclusion Gifts in 2026

A new year brings a fresh start to many things: professional goals, health and fitness resolutions, budget plans, and more. In estate planning, it also means a reset of your annual exclusion.

The annual exclusion is the amount each person may give to any recipient once per year— to an unlimited number of recipients—without using their federal gift and estate tax exemption ($15,000,000 per person in 2026). In 2026, the annual exclusion is $19,000 per recipient. This means you may give $19,000 (or $38,000 for a married couple electing to gift split) to as many family members, friends, and loved ones as you choose without using any of your $15,000,000 exemption or being subject to federal gift tax. These gifts add up over time and can play a meaningful role in your overall estate planning strategy. Read on to learn more about the different ways in which you can leverage this estate planning tool.

Outright Transfers

Annual exclusion gifts may be made outright by giving cash or a check to the recipient or by sending a wire. This is a common strategy for those making gifts to adult children or other relatives and gives the recipient immediate access to the funds. However, the funds need not be spent right away. Annual exclusion gifts are often used to fund individual or revocable trust accounts for older children or grandchildren as a way to provide independence over a manageable sum of money, foster a relationship with the family’s advisory team, and begin to learn about investing and budgeting.

For minors, outright gifts may be made to custodial accounts known as UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) accounts. Funds in these accounts may be invested and are overseen by a custodian, typically a parent or other family member. Once the child reaches the age of majority, which varies by state and typically ranges from age 18 to 25, the account must be closed and the beneficiary will have full control over the funds. Often, the beneficiary chooses to move the funds into an individual or revocable trust account, but they may also choose to spend the funds, as they have full legal control.

If you choose to fund an UTMA or UGMA account, it is important to work with your advisors to understand the applicable state law, including the age at which the beneficiary gains control, the responsibilities of the custodian, and the rights of the beneficiary while he or she is a minor.

Transfers in Trust

If making an outright gift does not feel appropriate, you may utilize the annual exclusion to fund a new or existing trust. Annual exclusion gifts may be made to certain types of trusts that provide the beneficiary with a withdrawal right (often referred to as a “Crummey” power). Annual exclusion gifts are subject to a present interest requirement, which means the beneficiary must have the ability to access the funds immediately. While this requirement is satisfied with outright gifts, that is not so with gifts in trust as the trustee typically controls distributions.

This issue is addressed by granting the beneficiary the power to withdraw the annual exclusion contribution (or a pro rata share if a contribution was made to a pot trust) that was gifted to the trust for a specified number of days without the consent of the trustee. After that period expires, the withdrawal right lapses and the funds are governed by the terms of the trust. The trustee must provide notice of the contribution, the withdrawal amount and the deadline to beneficiaries in order to qualify for the annual exclusion.

These types of annual exclusion trusts are often attractive options for those who wish to benefit young children or grandchildren but prefer not to fund an UTMA or UGMA account. Note that additional requirements apply to qualify gifts for the generation-skipping transfer (GST) tax annual exclusion, so those making annual exclusion gifts in trust for grandchildren should work closely with their advisors to ensure the proper structure is in place.

College Savings Plans

Finally, annual exclusion gifts may be made to college savings accounts, commonly referred to as Section 529 plans. These accounts, which are governed by state law, are funded with after-tax dollars but grow tax-free, and withdrawals are tax-free when used for qualified education expenses. Qualified expenses generally include tuition, fees, books, supplies, computer equipment, and certain room and board costs. For younger beneficiaries, up to $20,000 may be distributed per year for K-12 expenses.

Many parents and grandparents pay for tuition directly because doing so is not considered a gift and therefore does not use any of the payor’s federal gift and estate tax exemption. However, this exception only applies to tuition and does not cover room and board, fees, books, or other associated costs of attending college. As a result, a 529 plan can be a useful complement to direct tuition payments because it may be used to pay for those additional expenses.

In addition to the income tax advantages of 529 plans, these savings vehicles allow individuals to leverage the annual exclusion through “superfunding,” which permits funding a 529 account with five years’ worth of annual exclusion gifts at once. In 2026, this means you could contribute $95,000 (or $190,000 for a married couple electing to gift split) to a college savings plan upfront, allowing the funds to benefit from compounding and tax-free growth sooner. If you take advantage of this option, you may not make additional annual exclusion gifts to the same beneficiary for the next four years and you must file a gift tax return to report the contribution (though none of your lifetime exemption will be used). If you pass away during the five-year period, a portion of the gift may be included in your estate.

While superfunding a 529 plan can be a powerful planning strategy, care should be taken not to overfund the account, particularly if you also plan to pay tuition directly or have other education funds set aside. Your SCS advisor can work with you to determine an appropriate funding amount.

If an account is overfunded, several options are available. The beneficiary may keep funds in the account for future graduate level education or transfer the remaining funds to a college savings account for another eligible beneficiary, such as a sibling, child, or spouse. Depending on the recipient of the unused funds, transfer tax consequences may apply, so consultation with advisors is important.

Recent legislative updates have added additional flexibility for those with unused funds in their 529 account. If the account meets certain requirements, including being open for at least 15 years, funds may be rolled over into a Roth IRA for the same beneficiary, subject to annual IRA contribution limits and a $35,000 lifetime cap. Funds may also be used to repay qualified student loans (up to $10,000 per individual) or to pay for certain apprenticeship programs. Withdrawals for non-qualified expenses are permitted, but earnings will be subject to income tax and the withdrawal may incur a 10% penalty, making proactive planning and ongoing management essential. Note that if the beneficiary receives a scholarship, a withdrawal up to the amount of the scholarship may be made without penalty, but earnings will be subject to tax.

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For many individuals, making an outright annual exclusion gift is the right option for both the donor and the beneficiary. However, with so many strategies available, it is important to consider your options carefully before writing a check. Your SCS team is available to help you evaluate and implement a gifting strategy for 2026 and beyond.