Actually, gift tax is governed by federal law and not by state law, so these same laws will apply regardless of what state you or your children live in.
First, if and when gift tax is ever due, it is paid by the donor and not by the recipient of the gift. However, under current regulations, each taxpayer is allowed to give gifts in their lifetime of up to $1 million before any gift tax becomes due. This is part of what is called the Uniform Tax Credit Act.
In addition to the $1 million lifetime exemption, each individual is allowed to give annual gifts of up to $13,000 to any number of individuals, and those gifts do not even apply towards the lifetime exemption, nor do they need to be reported. Gifts which exceed the annual exclusion of $13,000 must be reported by the donor by filing Form 709 with the IRS to report the value of the gift. However, no tax is actually due unless that donor has already reached his $1 million lifetime limit. The amount reported then reduces that donor's remaining lifetime balance that he may give in non-taxable gifts.
Since you husband is deceased, he cannot now give gifts from his insurance proceeds.
So to sum up your particular situation, you may actually give gifts of up to $1 million total without having to pay any gift tax. But if you want to stay below the reporting requirements, then your gifts should not exceed $13,000 per year to any one individual.
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Thank you westlake and let me know if you have more questions.
This is exactly what I thought.
Could I loan them $ for a down payment on a home....and have them sign a promissary note which I could eventually forgive?
If so, could I loan them 200,000----and what would be an acceptable interest rate to charge on the loan so the IRS does not complicate my life?
This is my last question....and I will accept your advice.
Thank you for your time.
Hello again westlake,
First of all, since you are allowed to give up to $1 million in lifetime gifts without owing any gift tax, there is really no reason for you to not just go ahead and give them the $200,000, and not worry about classifying this as a loan. The only thing you would be required to do is file Form 709 to report the gift since it exceeds the allowed annual exclusion of $13,000 per year. But you would still not owe any tax on the $200,000. The $200,000 would simply be applied to your $1 million lifetime limit on gifts, and would reduce your remaining gift exemption to $800,000. So you could still give up to another $800,000 in lifetime gifts without ever owing any tax.
If for some reason you want to classify this as a loan, then you could do so, and then each year you could cancel $13,000 of the remaining balance by gifting them that amount. Just keep in mind that if you do it this way then you will need to report the interest that they are paying you on the loan, or that they are supposed to paying you on the loan. If you decide to go this route, then you should charge them at least the applicable federal rate on interest which varies from month to month. Here is a link to the IRS web page where you can access the most current rates.
If this was helpful please press the Accept button. Positive feedback is also appreciated.
Thank you westlake