Ch5. Estate and Gift Tax — Taxes on Transferring Wealth

Overview of Estate and Gift Tax

Estate tax: A federal tax on the transfer of property from a deceased person to their heirs. Governed by IRC §§ 2001–2210.

Gift tax: A federal tax on transfers of property during life made without adequate consideration. Governed by IRC §§ 2501–2524.

The two taxes are unified under the IRC — they share a single progressive rate schedule and a single lifetime exemption (the unified credit). Lifetime gifts reduce the exemption available for the estate.

Federal Estate Tax

Who Is Responsible?

The estate itself is the taxpayer. The executor (personal representative) files Form 706 and pays the estate tax from estate assets.

Estate Tax Computation

Gross Estate (FMV of all property owned at death — IRC § 2031)
  + Taxable lifetime gifts (post-1976 gifts)
  − Funeral and administration expenses
  − Debts of the decedent
  − Casualty losses during administration
  − Charitable deductions (IRC § 2055)
  − Marital deduction (unlimited — IRC § 2056)
= Taxable Estate
  + Adjusted taxable gifts (post-1976 taxable gifts)
= Tax Base
  × Tax Rate (40% on amounts above the exemption)
= Tentative Tax
  − Unified Credit (based on the lifetime exemption)
= Estate Tax Due

Key Deductions

Unlimited Marital Deduction: All property transferred to a surviving spouse is deducted — eliminating estate tax at the first spouse’s death. Tax is deferred until the second spouse’s estate.

Charitable Deduction: Unlimited deduction for transfers to qualifying charitable organizations. A powerful tool for reducing a taxable estate.

Portability: The deceased spouse’s unused exemption amount (DSUE) may be transferred to the surviving spouse by filing Form 706 and electing portability — effectively doubling the surviving spouse’s exemption.

2024 Estate and Gift Tax Exemption

	2024 Amount
Lifetime exemption per person	$13.61 million
Married couple combined	$27.22 million
Top estate tax rate	40%

Sunset provision: Under TCJA, the doubled exemption is scheduled to revert to approximately $7 million per person (inflation-adjusted) on January 1, 2026 unless Congress acts. This is a critical planning consideration for 2024–2025.

Gift Tax

Who Pays?

The donor (the person making the gift) pays the gift tax. If the donor doesn’t pay, the IRS can collect from the recipient.

Gift Tax Rate

Same 40% rate as the estate tax on amounts above the lifetime exemption.

Annual Gift Tax Exclusion (2024)

Relationship	Annual Exclusion per Recipient
Anyone (not just family)	$18,000 per donor per recipient
Married couple (gift-splitting)	$36,000 per recipient

Key rule: Gifts within the annual exclusion do not reduce the lifetime exemption. You can give $18,000/year to as many people as you wish with no gift tax consequences and no reporting required (unless gift-splitting, which requires Form 709).

Unlimited Exclusions

Certain transfers are completely excluded from gift tax regardless of amount:

Tuition paid directly to an educational institution (§ 2503(e))
Medical expenses paid directly to the medical provider (§ 2503(e))
Transfers to a US citizen spouse (unlimited marital deduction)
Transfers to a qualifying political organization

The Unified Credit and Lifetime Exemption

The unified credit is the tax credit that effectively exempts the first $13.61 million of taxable transfers per person from the estate and gift tax:

Each taxable gift > annual exclusion:
1. Reported on Form 709
2. No tax immediately paid (until lifetime exemption is exhausted)
3. The lifetime exemption amount is reduced

Only after the lifetime $13.61M is exceeded does any gift or
estate tax become payable.

Planning Around the 2026 Sunset

Current window (2024–2025):
- Exemption: $13.61M per person
- After Jan 1, 2026 (if no legislation): ~$7M per person

Action: Large gifts made now using the higher exemption
are "grandfathered" — the IRS has confirmed in regulations
that gifts made under the higher exemption will not be
"clawed back" if the exemption decreases.

Strategy: Make large gifts by Dec 31, 2025 to lock in the
current high exemption.

Interaction of Gift Tax and Estate Tax

Bringing Prior Gifts Back into the Estate

Gifts are brought back into the estate tax computation (added to the taxable estate) to prevent deathbed gifting from avoiding estate tax. However, the gift tax paid on taxable gifts made within 3 years of death is added back to the gross estate (the “gross-up” rule).

Tax Planning: The More, the Earlier

Starting early is the most powerful strategy:

Annual exclusion gifts of $18,000/year to a child for 30 years =$ 540,000 transferred free of gift/estate tax
Combined with trust strategies, far more can be removed from the estate

Appreciating assets: Gift appreciating assets early. Future appreciation occurs outside the estate, reducing estate tax. A classic vehicle is a GRAT (Grantor Retained Annuity Trust).

Installment Payment of Estate Tax (IRC § 6166)

If the estate includes a closely-held business representing more than 35% of the gross estate, the executor may elect to pay the estate tax attributable to the business in installments over up to 14 years — a significant liquidity relief.

Gift Tax Calculation Example

Scenario: Parent (age 55) gifts $500,000 in cash to an adult child in 2024.

Gift amount: $500,000
− Annual exclusion: $18,000
= Taxable gift: $482,000

Is gift tax due?
$482,000 < $13,610,000 remaining lifetime exemption
→ No gift tax due now
→ Lifetime exemption reduced by $482,000
→ Future gifts and estate will have $13,128,000 remaining exemption

After 10 more years of $18,000 annual exclusion gifts: → Additional$ 180,000 transferred — zero gift tax, zero reduction of lifetime exemption

Learning Checklist

Walk through the estate tax computation from gross estate to tax due
State the 2024 lifetime exemption amount and the 2026 sunset risk
Explain the annual gift tax exclusion and how it differs from the lifetime exemption
Describe the unlimited marital deduction and portability election
Explain the benefit of gifting appreciating assets early

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