How can I avoid paying gift tax on inheritance?

If you use inherited funds to pay off a mortgage of your sister, you, as the donor, must pay gift tax beyond the exemption allowed every year. You could consider paying down your sister's mortgage every year by the exemption amount, and therefore avoid the gift tax - although it may take some years to pay it all off.

First, there is no "gift tax" on an inheritance. Second, if you are worried about an "estate tax" on your inheritance, you mother had an estate tax exclusion that might have been as much as $3,500,000. Third, if the money was left to you but you are going to use it to pay off your sister's mortgage, then the question is "how much" because you have your own $1,000,000 gift exclusion. So discuss this with your CPA. If the amount is more than $13,000 and less than $1,013,000, you will have to file a Federal gift tax return (IRS Form 709), but you will not have to pay a gift tax. Best regards.