Estate and Gift Tax

The estate tax applies to a decedent’s gross estate, which generally includes all the decedent’s assets, both financial (e.g., stocks, bonds, and mutual funds) and real (e.g., homes, land, and other tangible property). It also includes the decedent’s share of jointly owned assets and life insurance proceeds from policies owned by the decedent or payable to the descendant’s estate or used to discharge a legal obligation of the estate. To exclude life insurance death benefit from estate taxation, the life insurance policy should be owned by an irrevocable life insurance trust. All transfers in excess of the exemption ($13.61 million per individual in 2024) are taxed at the top rate of 40%.

Congress enacted the gift tax to prevent donors from avoiding the estate tax by transferring their wealth by gift before they died.

The federal gift tax provides a lifetime exemption of $13.61 million per donor in 2024. This exemption is the same as that which applies to the estate tax and is integrated with it such that lifetime gifts (except those that qualify for the gift tax annual exclusion) reduce the exemption amount available for estate tax purposes. Beyond that exemption, donors pay gift tax at a the rate of 40 percent (same as the estate tax rate). It is noteworthy that the gift tax is tax exclusive while the estate tax is tax inclusive (i.e., we do not have to pay gift tax on the money we use to pay gift tax but we do pay estate tax on the money we use to pay the estate tax).

An additional amount each year is excluded from gift taxation. This so-called annual exclusion ($18,000 in 2024) is indexed for inflation in $1,000 increments and is granted separately for each donee. Thus, an individual with two children could give his children a total of $36,000 each year ($18,000 to each child) without owing tax or using any portion of his lifetime exemption.

Gifts received are not taxable income to the recipient.