The $14,000 gift exclusion mentioned above just means that you don’t even have to report gifts on your tax return unless you give away more than $14,000 in a year. But the federal lifetime gift tax only kicks in after you give away over $5.34 million worth of gifts. You should be very proud indeed if you find yourself required to pay the federal gift tax. (In fact, even if you give away no more than $15,000 per year every year, you would have to reach age 356 for this to be a federal tax issue.) So there are situations in which giving away larger gifts reduces your total estate tax by bringing your taxable estate into a lower tax bracket.
Unfortunately, this approach will not help you avoid the estate tax altogether. That’s because, although there is no state gift tax in Massachusetts, lifetime gifts count towards the value of your estate. In the above example, we saw how Michelle could gradually reduce her estate’s value by making smaller gifts over time. If she instead gave one, lump-sum gift of the same amount ($100,001) on her death bed, her estate would remain above the threshold. That’s why this “deathbed gifting” approach is no substitute for good, advanced planning.