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Question:

My wife and I are in our early 80s with two daughters and a grandson. Our estate is approximately $5.5 million. We have enough pension resources so we do not withdraw any money from savings or investments. We gift the maximum to each of our three beneficiaries. We live in Washington state and do not have a state income tax. Is there any way we can “gift” a portion of their inheritance to each of them without incurring a federal tax liability?

Response:

Yes. You can give any amount you wish to your daughters and grandson without any federal tax liability. If you give anyone more than $16,000 in a calendar year ($32,000 between you and your wife), you must file a federal gift tax return. But under current law, until you give $12 million each there’s no actual tax due. This amount is slated to be reduced in half when the Trump-Ryan tax cuts are grandfathered out in 2026, but that will still leave $12 million (adjusted for inflation) between the two of you, so there’s a large cushion there.

A few other things to be aware of:

First, in most cases it doesn’t make sense to gift appreciated assets because then your daughters and grandson would have to pay taxes on capital gains when they’re sold.

Second, in addition to the $16,000 annual gifts, there’s no gift tax reporting requirement for payments you might make for health care costs and tuition as long as you make them directly to the providers.

Third, while Washington does not have an income tax, it does have an estate tax. The current threshold is $2.193 million. With proper planning (credit shelter trusts), you and your wife can shelter twice this amount from taxation, but that would still leave about $1 million subject to tax upon the death of the survivor. Gifting could reduce the value of your estate and help avoid this tax. However, you will need to consult with a Washington estate planning attorney both to set up the trusts and for a better understanding of the gifting rules in Washington.

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