Question: 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?
Answer: 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 $11.7 million lifetime gift and estate tax exemption (2021). A person can give up to $11.7 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 may continue to increase 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.