Ch6. Estate and Gift Tax — Taxation of Gratuitous Transfers

Estate Tax

Estate Tax Overview

Taxpayer: The estate of the deceased (the executor files and pays)
Form: Form 706 (United States Estate and Generation-Skipping Transfer Tax Return)

Taxable transfers:
All property in the gross estate at the date of death

Filing deadline:
9 months after the date of death
(6-month automatic extension available; tax still due in 9 months)

Estate Tax Computation

Gross Estate (FMV of all property owned at death — IRC § 2031)
  + Post-1976 adjusted taxable gifts (added to compute tax base)
  − Deductions:
      Funeral expenses
      Estate administration expenses (legal, accounting, executor fees)
      Decedent's debts (mortgages, credit cards, other liabilities)
      Losses during estate administration
      Charitable bequests (unlimited — IRC § 2055)
      Marital deduction (unlimited to US citizen surviving spouse — IRC § 2056)
= Taxable Estate
  × Tax Rate (40% on amounts above the exemption)
= Tentative Tax
  − Unified Credit (based on the applicable exclusion amount)
  − Credit for state death taxes (limited)
  − Credit for prior transfers (within 10 years)
= Net Estate Tax Due

Estate Tax Deductions

Marital deduction: Unlimited transfer to surviving US citizen spouse
→ Defers estate tax until the second spouse's death
→ Non-citizen surviving spouse: Qualified Domestic Trust (QDOT) required

Charitable deduction: Unlimited — transfers to qualifying charities

Expenses: Funeral costs, estate administration, debts

Other deductions:
- Qualified Family-Owned Business Interests (QFOBI): limited deduction
  for qualifying small business interests
- Casualty losses during estate administration

Gift Tax

Gift Tax Overview

Taxpayer: Donor (the person making the gift)
Form: Form 709 (United States Gift and Generation-Skipping Transfer Tax Return)
Filing deadline: April 15 of the following year

Non-taxable gifts (fully excluded — no Form 709 required):
- Gifts within the annual exclusion ($18,000 per recipient in 2024)
- Direct tuition payments to educational institutions (§ 2503(e))
- Direct medical payments to medical providers (§ 2503(e))
- Transfers to a US citizen spouse (unlimited marital deduction)
- Transfers to qualifying political organizations

Gift tax exclusion (10-year aggregation → US: annual exclusion per year):
Annual exclusion: $18,000 per donor per recipient (2024)
→ No aggregation: each calendar year is independent
→ In prior years this was lower ($16,000 in 2022; $17,000 in 2023)

Gift Tax Computation

Gift amount
  − Annual exclusion ($18,000 per recipient, 2024)
= Taxable gift (for the year)
  − Lifetime exemption remaining ($13.61M − prior taxable gifts)
= Amount subject to current gift tax (if any)
  × Tax Rate (up to 40%)
= Gift tax due (rarely owed until exemption is fully used)

Note: For most donors, gifts reduce the lifetime exemption rather
than triggering immediate tax. Gift tax is generally not paid until
the cumulative lifetime taxable gifts exceed $13.61M.

Estate and Gift Tax Rates

Unified rate schedule (same for both estate and gift):
Taxable Transfer     Rate    Cumulative Tax
$0 – $10,000         18%     $1,800
$10,001 – $20,000    20%     $3,800
$20,001 – $40,000    22%     $8,200
$40,001 – $60,000    24%     $13,000
$60,001 – $80,000    26%     $18,200
$80,001 – $100,000   28%     $23,800
$100,001 – $150,000  30%     $38,800
$150,001 – $250,000  32%     $70,800
$250,001 – $500,000  34%     $155,800
$500,001 – $750,000  37%     $248,300
$750,001 – $1M       39%     $345,800
Over $1,000,000      40%     Calculated

Effective maximum rate: 40%
Unified credit (2024): $13,610,000 applicable exclusion amount
→ Effectively shields the first $13.61M per person from tax

Aggregation of Prior Gifts Into the Estate

Prior taxable gifts and the estate:
Under the "unified system," all post-1976 taxable gifts are added
back to the estate tax base when computing the estate tax:

Estate tax base = Taxable estate + All post-1976 adjusted taxable gifts
→ This prevents deathbed gifting from avoiding estate tax

Credit for gift taxes paid:
Gift taxes actually paid in prior years are credited against
the estate tax, preventing double taxation of the same transfers.

The 3-year rule for gift tax gross-up:
Gift tax paid within 3 years of death is included in the gross estate
(the "gross-up" rule of IRC § 2035) — this prevents deathbed gifting
specifically to reduce the estate below the estate tax threshold.

*Applicable exclusion amount: $13.61M** ★★★★★ : Each person can transfer$ 13.61M free of estate/gift tax. Sunset to ~ $7M on Jan 1, 2026 unless extended by Congress. *Memory tip:$ 13.61M (2024), shared between lifetime gifts and the estate

Gift tax annual exclusion ★★★★★ : $18,000 per recipient per year (2024). Gifts up to this amount are completely excluded — no Form 709 required, no lifetime exemption reduction. *Memory tip:$ 18,000 per person, per year, to as many recipients as desired*

Estate tax aggregation window ★★★★☆ : All post-1976 taxable gifts added back to estate tax base. No 10-year or 5-year lookback like Korean system — ALL prior gifts are included in the unified tax base. Memory tip: US: all post-1976 gifts aggregated; Korean system: 10/5-year lookback

Practice Quiz

Q. A parent gifts $500,000 to a child in 2024. What is the taxable gift, and does gift tax have to be paid?

Taxable gift = $500,000 −$ 18,000 annual exclusion = $482,000. Is gift tax due? No —$ 482,000 < $13,610,000 remaining lifetime exemption. No gift tax is due; the parent must file Form 709 to report the taxable gift and reduce their remaining exemption by$ 482,000.

Q. A parent dies in 2024 with a gross estate of $10,000,000 after debts. The surviving spouse is a US citizen. Is estate tax due?

No estate tax due. The unlimited marital deduction allows the entire $10,000,000 to pass to the surviving spouse without estate tax. Estate tax is deferred until the surviving spouse’s death.