Q.  My wife and I are considering making large gifts to our two children and three 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) $16,000 Per Year: The IRS recently announced an increase in the Annual Exclusion Gift Amount, i.e. the amount that may be gifted to any person without filing a Gift Tax Return. In 2022, it will increase from $15,000 to $16,000 per recipient. Such gifts are called Annual Exclusion Amount Gifts (“AEA Gifts”) and you can make such gifts to as many 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 $32,000 to each recipient in year 2022, for a total of $160,000 from both of you ($16,000 x 2 donors x 5 recipients), again without the need to file a Gift Tax Return or incur any gift tax.

3) “Year End Straddle”: If you act before the end of this current year (2021), you could each gift $15,000 to each of your loved ones ($15K X 5 = $75,000). Then, on or after January 1, 2022, you and your wife could do the same thing once again, albeit at the higher rate of $16,000 for donee, as you would then be in a different tax year, and thereby give away another $80K apiece.  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, together, gift away a total of $310,000 ($75 x 2 Donors x 5 Recipients=$150K in 2021), plus ($80K x 2 Donors x 5 recipients = $160K) 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 (aka, the “Unified Credit”). That Lifetime Exemption is currently $11.7 million per person for U.S. citizens, but increases to $12.06 million per person next year (2022). 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” and would allow a married couple– beginning next year — to effectively gift away $24.12 Million over their two lifetimes without incurring any gift or estate tax.

NOTE:  Absent any change in the federal law regarding Gift Taxes, this large, current Lifetime Exemption is set to ‘sunset’ on December 31, 2025, and to then drop back down to the prior exemption amount as it existed in 2016, i.e.   $5 Million per person, adjusted for inflation, which will result in an exemption amount of roughly $6.6 million in 2026. The good news is that the IRS has recently clarified that making gifts now, before 12/31/2025, will not adversely affect individuals after the law sunsets; their estates will still be entitled to the larger tax credit for gifts made before 12/31/2025.

2) Gift Tax Return:  To the extent that your gifts exceed the Annual Exclusion Amount, you must file a Gift Tax Return. But no gift tax would be due so long as your cumulative gifts are 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 lifetime, then your remaining exemption to apply against estate taxes upon death would be $1 million less.

3) Rules May Be Different for Non-US Citizens: Note that the rules for persons who are not U.S. Citizens may be different. Consult your tax advisor if you are in this group.

Caution:  Before making large gifts, be sure that you can afford to do so. 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 first consult a professional with special knowledge about the Medi-Cal program, as such gifts may impair your eligibility for a Medi-Cal subsidy unless handled in a very special manner.