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 one cannot gift more than $15,000 per year/person without incurring a gift tax. Not so. In fact, an individual can actually currently gift more than $11 million during lifetime without incurring a gift tax. Here is the way gift taxes work:
Annual Exclusion Gifts: No Gift Tax Return Required:
1) $15,000 Per Year: You and your spouse can each gift up to $15,000 per year per recipient without the need to file a Gift Tax Return. Such gifts are called Annual Exclusion Gifts and you can make such gifts to as many individual persons as you wish each year, provided that you make only one such annual gift to each recipient.
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), again without the need to file a Gift Tax Return or incur any actual gift tax.
3) Year End Straddle: On or after January 1, 2021, 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 6 recipients without the need to file a Gift Tax Return or 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 (“AEA”), then you can still make them gift tax free by using a portion of your Lifetime Exemption (also called the “Unified Credit”). That Lifetime Exemption is currently $11.58 million per person for U.S. citizens, and increases to $11.7 million per person next year. AEA gifts do not count against this exemption, and they can be made in addition to Lifetime Exemption gifts. Also, by making a timely election after the death of a spouse, the surviving spouse can opt to preserve the deceased spouse’s unused Lifetime Exemption for the survivor’s own later use, thereby effectively doubling it. This is called “portability”.
2) Gift Tax Return: To the extent that your gifts exceed the Annual Exclusion Amount, you must file a Gift Tax Return even though no actual gift tax would be due, so long as less than the Lifetime Exemption. Reason: 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. Lastly, if there is a possibility that either of you may need to apply for a Medi-Cal subsidy for nursing home care in the near future, you should consult a professional with special knowledge about the Medi-Cal program before making those gifts: Gift transfers may adversely affect your ability to qualify for a Medi-Cal subsidy unless those gifts are handled in a very special manner.