Ask the Expert: Money to kids, not IRS

I've recently inherited money, and I'd like to give some of it to my children. Would there be any tax problems for me in doing so? Are there IRS forms I have to fill out?

You may have to file a gift tax return, depending on the amounts involved. But you won't have to enclose a check to the IRS.

Each taxpayer can give $13,000 a year apiece to an unlimited number of people without incurring a tax or having to file paperwork. Together, you and your spouse could give each of your children $26,000 a year. If you exceed the $13,000 a person annual limit, you must report the excess to the IRS on Form 709. When you die, these excess gift amounts reduce your federal estate tax exemption. But that won't make you vulnerable to federal estate tax unless you're extremely wealthy. The current federal exemption is worth $5 million -- more than enough for most of us to be generous donors without having to fear we'll leave a federally taxable estate. If your gifts exceed the annual limit by $200,000, for example, your exemption would shrink to $4.8 million.

True, the $5 million federal exemption expires at the end of 2012, and no one knows what it will be thereafter. But tax experts consider it unlikely that gifts made in 2011 and 2012 will come back to haunt you, regardless of future changes in the federal estate tax exemption. And New York State taxes estates worth more than $1 million, but doesn't tax gifts, says Alan E. Weiner, a Melville tax accountant -- so if you're a New Yorker worth more than $1 million, gifts reduce your state estate tax regardless of your federal tax situation.

The bottom line: You can make generous financial gifts to your children without triggering federal or state gift taxes.

Websites with more information: 1.usa.gov/iOAhSz and bit.ly/iOI3Ap