As my colleague Scott Zucker explains in a recent post, gift taxes are “tax exclusive” – the tax is paid by the donor in addition to the gift. This means that if you make a gift (with some exceptions) you don’t have to pay estate tax again on that gift, and the tax (assuming you do not choose to use the lifetime gift tax exemption), which was paid in addition to the gift, does not count again either. In contrast, if you keep the asset in your estate, the estate tax comes out of the estate. Since the estate tax is 35% of assets over the $5 million exclusion, it may be worth it, even to pay gift tax at the same rate, because the amount of tax you pay does not get taxed. For this reason, some people choose to pay the gift tax, rather than “burning” any of the generous $5 million federal gift tax exclusion.
Here in Massachusetts, there is no additional state gift tax. If your estate is under the federal exclusion of $5 million, and you live in Massachusetts, your estate will pay no federal estate or gift tax at all. But, let’s assume that you are under the federal exclusion, but but over the Massachusetts filing limit of $1 million. If you are far enough under the federal limit, you can use gifts to move assets out of your estate to bring it under the Massachusetts limit. Your trustee will still have to report these gifts to Massachusetts, but the gifts will not trigger a tax.
As always with gifts, you need to have a solid plan for long-term care before you start thinking about them. If you do not have long term care insurance, and you gift your house out of your estate, you may jump out of the tax kettle into the Medicaid fire. It is important to consider all the possible consequences of a gift. For this reason, making a gift as part of your estate plan is something you should discuss with your estate planning and elder law attorney.