This is the time of year when I receive numerous calls from clients asking about year-end gifts they want to give to their children or other relatives and friends. Many have questions about the amount they can gift away without having to pay a gift tax.
You can give $14,000 per person per year (soon to be $15,000 in 2018) without paying a gift tax or needing to file a gift tax return. However, our federal tax system gives each of us the right to give away, either during life or at death, up to $5,490,000 (increasing to $5,600,000 in 2018). These amounts are indexed to inflation and increase over time. If a gift to one person exceeds $14,000, a gift tax return is needed that year (to keep track of lifetime gifts) but no gift tax is paid until you reach the lifetime gift amount ($5,490,000).
So unless you think your taxable estate at death will exceed the federal estate and gift tax exemption amount ($5,490,000 for 2017; $5,600,000 for 2018), the $14,000 annual exclusion shouldn’t really concern you. Remember, a gift (no matter how much) is not income to the person receiving it, and thus is not subject to income tax. Additionally, there is no Massachusetts gift tax. There is also no federal gift tax to pay unless your lifetime gifts exceed the exemption amount of $5,490,000 (for 2017). So for practical purposes, unless you have a large estate, there is really no limit to the amount you can give to anyone at any time.
For Massachusetts estate tax planning purposes, there may even be a benefit to giving your kids some of the money they will ultimately inherit from you anyway. For example, if you die with a Massachusetts taxable estate of $1,800,000, your estate will pay an estate tax of $85,200. If you give away, say, $200,000 of that before your death, the remaining taxable estate of $1,600,000 Million will only be taxed $70,800. So you actually save $14,400 in taxes.
There are some things you may not want to give away early. For example, if the $200,000 you just gave your kids was in the form of low basis stock (i.e. stock you bought a long time ago for very little cost), then leaving it to your kids after you die would probably save them more in capital gain tax when they sell the stock than the amount your estate would save in estate tax, if you made the gift now. So it’s always best to talk with your accountant or estate planning lawyer before you give away any portion of your estate.