In the post on my parents and Medicaid, I said that after my father's death, my mother might want to give my sister and me cash gifts up to the maximum allowed amount. Commenter Moom asked if we really needed to limit ourselves to that maximum because my parents' estate would be too small to be subject to the estate tax anyway. I thought the maximum annual amount still applied because my sister and I would have to pay taxes on it if it was over that amount-- but I just looked into that a bit more, and it seems I was wrong:
No tax payable by the person receiving your gift or
bequest. Generally, the person who receives your gift
or your bequest will not have to pay any federal gift tax or
estate tax because of it. Also, that person will not have to
pay income tax on the value of the gift or inheritance
But in general, the person giving a gift does have to pay taxes on it unless it meets certain criteria:
The gift tax applies to transfers by gift of property. You
make a gift if you give property (including money), or the
use of or income from property, without expecting to
receive something of at least equal value in return. If you
sell something at less than its full value or if you make an
interest-free or reduced-interest loan, you may be making
The general rule is that any gift is a taxable gift.
However, there are many exceptions to this rule.
Generally, the following gifts are not taxable gifts:
• Gifts, excluding gifts of future interests, that are not
more than the annual exclusion for the calendar
• Tuition or medical expenses you pay directly to a
medical or educational institution for someone,
• Gifts to your spouse,
• Gifts to a political organization for its use, and
• Gifts to charities.
The annual exclusion amount for 2008 was $12,000.
[IMPORTANT NOTE: coming back to Medicaid issues again for a minute, you have to remember that this gift limit only relates to taxation. For the purposes of Medicaid eligibility, you can't give away any money at all other than maybe a few hundred dollars here and there.]
I won't get into any details about the estate tax--for 2009, your estate has to be $3.5 million or more, so it is relevant to only a tiny percentage of people, and certainly not my parents, alas! But you can read more about gift and estate taxes in the IRS document linked below.
IRS publication 950, Introduction to Estate and Gift Taxes