Q. My wife and I are considering making large gifts to our two children and four grandchildren, and we would like to do so in a way that is “tax wise”. Do you have any advice for us?

A. Yes. Many people mistakenly believe that you cannot gift more than $15,000 per year without incurring a gift tax. Not so. In fact, many will be surprised to learn that in 2019 an individual can actually gift more than $11.4 million during lifetime without incurring a gift tax, under the current Tax Cuts & Jobs Act (“TJCA”), which remains on the books through the end of 2025, unless extended by further act of Congress and the President. While a Gift Tax Return will be due for large gifts, there will be no tax if under the amount of that Lifetime Exemption Amount ! Here is the way gift taxes work:

Annual Exclusion Gifts: No Gift Tax Return Required:

1) $15,000 Per Year:  Each of you can gift up to $15,000 per year per recipient without the need to file a Gift Tax Return. Such gifts are called Annual Exclusion Amount (“AEA”) gifts and you can make such gifts to as many persons as you wish each year. As the name implies, none of these gifts would reduce your lifetime exemption.

2) “Doubling Up”:  If you and your wife are in a position to do so, together you can actually double that amount for each gift recipient. So, together, you could gift a total of $30,000 to each recipient for a total of $180,000 to your loved ones ($15,000 x 2 donors x 6 recipients), and none of these gifts would require the filing of a Gift Tax Return, the payment of any gift tax, or any reduction in your lifetime exemptions!

3) Year End Straddle: On or after January 1, 2020, you and your wife could do the same thing once again, as you would then be in a different tax year.  So, over the course of a period as short as a calendar week – provided that the week straddles both the last days of this year and the early days of next year — the two of you could gift a total of $360,000 ($180,000 x 2 Donors) to your loved ones without the need to file a Gift Tax Return, the payment of any tax, or the use any of your lifetime exemptions. I call this strategy the Year-End Gift Straddle. 

Gifts Above the Annual Exclusion: Gift Tax Return Required

1) Lifetime Exemption: If you choose to make gifts above the Annual Exclusion amount, then you can still make them gift tax free by using a portion of your Lifetime Exemption (also called the “Unified Credit” or Lifetime Exclusion). That Lifetime Exemption amount is currently $11.4 Million per person (2019), and will increase next year (2020) to $11.58 Million per person for U.S. citizens. Annual Exclusion Gifts do not count against this exemption; thus, AEA gifts can be made in addition to Lifetime Exemption gifts.  Also, by making a timely election, in a situation where one spouse has died, the surviving spouse can opt to preserve the deceased spouse’s unused exemption for the survivor’s own use, thereby effectively doubling it.

2) Gift Tax Return:  To the extent that your gifts exceed the $15 K per year AEA amount, you must file a Gift Tax Return — even though no actual gift tax would be due — if the excess gifts are still under the Lifetime Exemption Amount. Reason: the Gift Tax Returns are required for the larger gifts because the IRS wants to track your use of your lifetime exemption, so that it knows how much you have left to use upon death. Example: if you used $1 million of your lifetime exemption to make excess gifts during life, then your remaining exemption to apply against estate taxes upon death would be $1 million less.

Cautions:  Before making large gifts, be sure that you can afford to do so, and that your gift recipients will use the money wisely. Lastly, if there is a possibility that either of you may need to apply for a Medi-Cal subsidy for nursing home care within the next 2.5 years (soon to be 5 years), you should first consult a professional with special knowledge about the Medi-Cal program before making those gifts. Reason: Gift transfers may adversely affect your ability to qualify for a Medi-Cal subsidy unless those gifts are handled in a very special manner.


For More Reading:  Forbes Article, “IRS Announces Higher Estate & Gift Tax Limits for 2020”