By Gina M. Barry
Bacon Wilson P.C.
One of the most common areas of confusion with respect to estate planning is gift tax. Gifts are made for myriad purposes, including celebrating occasions, helping a child, protecting assets from potential nursing home costs, or reducing an estate for estate tax purposes. Gifts are often made without the realization that certain gifts must be reported to the government via a gift tax return. When taxable gifts have been made, the gift tax return must be filed by April 15 of the following year – i.e. along with your income tax returns.
Mass. is state tax-free!
Massachusetts does not impose a gift tax regardless of the amount that has been given away. For Massachusetts residents, tax is imposed only by the federal government. That being said, most people believe that they can gift $10,000 per year without reporting it. In fact, the annual exclusion amount is based upon the Consumer Price Index, and the exclusion has increased gradually from $10,000 in 1997 to $14,000 in 2017. This means that an individual can give up to $14,000 to as many people as desired in 2017, and there is no requirement to file a gift tax return reporting the gifts. A married couple can gift $28,000 ($14,000 each) to as many individuals as desired, as each spouse receives their own exclusion. If no gift tax return is required, then obviously no gift tax will have to be paid.
Gifts and estate planning
Although the gift tax annual exclusion is not limited to gifts to family members, gifting to family members can provide a great opportunity to transfer wealth and reduce potential estate taxes. For example, a married couple with three children and three grandchildren can gift $28,000 ($14,000 each) to each child and grandchild in 2017 without reporting the gifts. This would reduce their estate by $168,000. Even assuming that the annual gift tax exclusion never increased, if they repeat the same gifts each year, after 10 years, they would have removed $1,680,000 from their gross estate, which would translate into estate tax savings as well.
Removing value from an estate is most important when the estate’s value exceeds the estate tax threshold. In 2017, the Massachusetts estate tax threshold is $1 million, and the federal estate tax threshold is $5.49 million. By systematically gifting, what would have been a taxable estate can be reduced significantly, which would reduce, or even possibly eliminate, estate taxes at the time that the giver of the gift passes away.
The lifetime exemption
In addition to gifting using the annual exclusion amount, there is a $5,490,000 lifetime exemption from federal gift tax. This means that even if a taxpayer gives more than $14,000 to a single recipient in a given year, the gift amount above $14,000 will not be subject to tax unless the taxpayer has already given a total of $5,490,000 in taxable gifts in their lifetime. When a gift tax return is filed, the amount of the gift will use some of the donor’s unified credit, which is the credit that allows an individual to pass assets to their heirs at the time of their death without paying estate tax. In some situations, it makes sense to use some of the unified credit. For example, if the person giving the gift owns assets that are expected to appreciate substantially in value, gifting those assets before the appreciation occurs can lock the appreciation out of their estate for estate tax purposes and allow the recipient to reap the benefit of the appreciation.
No tax for recipients
It is also important to note that when a gift is given, it is not taxable to the recipient. Many people believe that if you give a gift in excess of the annual exclusion amount, the recipient will have to pay income tax on the excess amount; however, it should be noted that they will pay income tax on any interest that money may earn once the recipient of the gift invests the money received.
Gifting can play an important role in your estate plan, but should not be undertaken without a full analysis of your estate. Be sure to contact your local estate planning professional to review your gifting concerns before embarking on a gifting plan.
Gina M. Barry is a partner in the regional law firm of Bacon Wilson, P.C., Attorneys at Law. She is a member of the National Association of Elder Law Attorneys, the Estate Planning Council, and the Western Massachusetts Elder Care Professionals Association. She concentrates her practice in the areas of estate and asset protection planning, probate administration and litigation, guardianships, conservatorships and residential real estate. She may be reached at 413-781-0560 or gbarry@baconwilson.com.
