Rumor: “The law says that I can gift $17,000 to each of my children annually without penalty.”
Reality: As of 2023, the IRS allows each person to gift up to $17,000 to any individual annually without incurring any gift taxes. However, a variety of laws – such state estate and income taxes and Medicaid – should be considered carefully before gifts are made.
Gifting money to heirs before death is generous and can be enjoyable to both the giver and the recipients. Making monetary gifts is also a very important estate planning option. But a variety of federal and state tax laws, as well as Medicaid requirements, must be considered carefully before such gifts are made.
Federal Gift and Estate Tax
The IRS increased the annual gift tax exclusion to $17,000 in 2023. This means that an individual can now gift up to $17,000 each year to any individual without incurring any gift taxes. The annual gift tax exclusion allows a taxpayer to give or gift a certain amount of money or assets without resulting in the use of his or her lifetime federal gift and estate tax exemption. As of 2023, the lifetime federal gift and tax exemption is $12.92 million. It’s important to note that, unless further action is taken by Congress, the current gift and estate tax exemption will drop by about half — an estimated $6.2 million per person — at the end of 2025.
New Jersey Tax Laws
While New Jersey hasn’t imposed an estate tax since 2018, inheritance taxes may be due depending on who the beneficiaries of the estate are.
Estate taxes vary state-to-state but, generally, it applies to all property transferred from a deceased person to their heir.
New Jersey’s inheritance tax laws are complex and consider many factors, but only apply to certain beneficiaries of the estate depending on their relationship to the deceased. “Class A beneficiaries” are exempt from New Jersey’s inheritance tax. They include spouses, domestic/civil union partners, children, grandchildren, great-grandchildren, parents, grandparents, great-grandparents, stepchildren, adopted children or mutually acknowledged children. All other beneficiaries are categorized by class and within that class, the law determines the percentage of taxes to be applied.
It’s important to note that gifts in New Jersey are subject to the inheritance tax if they are made “in contemplation of death.” This means that any gift made within three years of death could be considered a death-bed gift and, thus, subject to the state’s inheritance tax.
Medicaid & Gifting Considerations
Medicaid gifting rules are completely different than tax rules, but problems may arise when the gifting party needs to apply for Medicaid benefits within five years of making gifts. This is because Medicaid applications carry a five-year “look back” period at where and how the applicant’s assets are spent. If it is determined that assets were gifted to qualify for Medicaid, the application will be subject to a penalty period and the applicant’s ability to receive Medicaid will be delayed.
Given the strategies and risks behind gifting in estate planning, as well as the ever-changing federal and state tax laws, it is crucial to consult with a qualified estate planning attorney before making gifts.
This is the final installment of our Rumor v. Reality estate planning series. Also in this series: