Q: I have 5 grandchildren and want to start gifting them money every year to help support their growing families. What are some gift tax consequences I need to consider? Do my grandchildren have to pay a tax on the gift? I have a relatively large estate, how will gifting affect this?
A: Under Federal law, a person can gift up to $15,000 per person, per year, without having to report the gift on a Gift Tax Return (Form 709). This is called the annual exclusion amount. Any gifts in excess of this amount must be reported on the return, but there will not necessarily be a tax due. Under Federal law, each person is afforded an $11.4 million lifetime gift and estate tax exemption (up from $11.18 in 2018). A person can give up to $11.4 million during their lifetime or after death without incurring a tax. The $15,000 annual exclusion will not be counted towards the exemption. Additionally, the recipient of the gift does not pay a tax on the gift.
What this means is you can gift $15,000 to each of your 5 grandchildren this year, which totals $85,000, and you will not have to report the gift to the IRS or apply this amount towards your lifetime exemption. If you gift $20,000 to each of your grandchildren, you will have to report the gifts, but only $5,000 per gift ($20,000 less the $15,000 annual exclusion amount), or a total of $25,000, will be counted towards your $11.4 million lifetime exemption. If you never reach the lifetime exemption, no tax will be due.
The Federal gift tax exemption amount will likely continue to increase for the next 6 years but will expire at the end of 2025 where the amount will plummet down to original exemption levels (between $5 and $6 million). However, any gifting that was done during this time will be honored even when the exemption drops to an amount lower than what was already gifted. For example, let’s say you make gifts to your grandchildren every year from 2019 through 2025, and the total amount reported on the gift tax returns equals $6 million. Then, in 2026, the exemption drops to $5 million. Even though your lifetime gifts exceed $5 million, you will not be taxed retroactively on the additional $1 million already gifted. Keep in mind you will not be able to continue gifting since you used up your $5 million exemption amount.
Gifting is a great way to provide for your loved ones, while also reducing your taxable estate when you die. However, because the Federal exemption refers both to assets gifted during your lifetime and assets that will be distributed after you die, lifetime gifts in excess of the annual exclusion amount will reduce your available estate tax exemption. Using the example above, if you gifted $6 million during your lifetime between 2019-2025 and you die with an additional $1 million in your estate when the Federal gift and estate tax exemption drops down to $5 million, the $6 million will not be taxed, but your estate will incur a tax on the $1 million since you used up the $5 million exemption during your lifetime.
For New York state residents, there is no additional state tax on gifts. In the past there was a lookback period for gifts made within three years of a person’s death. Gifts made during these three years were counted towards the total value of the decedent’s estate. Fortunately, for those who die after January 1, 2019, gifts will no longer be included as part of the estate no matter when they were made. The current NYS estate tax is at $5.74 million.
One thing to consider when making lifetime gifts is how this will affect eligibility for Chronic Medicaid (having Medicaid pay for nursing home care). In order to qualify for Medicaid to pay for a nursing facility, an applicant can have up to $15,450 in assets for 2019. Medicaid is authorized to look back at all transactions made by an applicant within the past 5 years prior to their application. Any transfer of assets made within this time that are below fair market value will incur a penalty period, including gifts made to loved ones. The applicant will be denied Medicaid coverage until the penalty period has ended. You will have to prove to Medicaid that you had a long history of gifting, and were not trying to move assets out of your name in order to qualify for Medicaid. This look back period does not apply for Medicaid services received in one’s home.
Before making large gifts during your lifetime, it is important to sit down with an Estate Planning and Elder Law attorney to help determine which estate planning tools will best help accomplish your goals, both during your lifetime and after death.
-- Michal Lipshitz, Esq. and Nancy Burner, Esq.