With nearly $27 billion having been collected under gift/estate tax in 2021 by the U S Government, it is no doubt important for anyone related to U S taxation to learn the basics of gift tax/estate tax. Interestingly, what is gift tax/estate tax for any tax payer in U S Taxation? (Gift tax was introduced in the year 1932 while estate tax got its life from 1916)
Now estate tax
Estate tax, often referred to as the “death tax,” is a federal tax on the transfer of property at death. It’s not a tax on the inheritance itself, but would rather revolve on the total value of the estate exceeding a certain amount, known as the “applicable exclusion amount.” Which is $ 15.00 million per individual or $30.00 million in case of joint return.
An estate, includes the following:
- Real estate
- Cash and securities
- Insurance
- Trusts
- Annuities
- Business interests
For 2025, the federal estate tax exemption is $15.00 million per individual. This means estates valued below this amount are not subject to federal estate tax. For example, if someone leaves behind a $15 million estate in 2024, estate tax would only apply to the amount above the $13.61 million exclusion. The tax would be calculated on the remaining $1.39 million.
What about state estate tax?
Yes, some states do have their own estate tax and they are:
As of 2024, thirteen states and the District of Columbia do have a separate state estate tax, each with its own exemptions and rates. Let me refer:
- Washington applies estate tax on assets over $2,193,000 in 2024.
- Connecticut’s exemption will match the federal level at $13,610,000 in 2024.
- Massachusetts and Oregon have much lower exemptions at $2,000,000 and $1,000,000 respectively.
- These facts will have to e refer again at the time of compiling the taxes for preparing the tax returns.
Time to learn about Gift Tax.
Gift Tax
Gift tax is a federal tax imposed on the transfer of assets in excess of an annual exclusion per recipient ($19,000 in 2026) from one person to another without receiving anything in return or receiving less than the full value of the gifted assets. It aims to ensure that individuals cannot avoid estate taxes by giving away their assets before they pass away. When making gifts, staying within the annual exclusion amount set by the IRS is crucial.
Let us study estate tax/gift tax together for their impacts.
Their valuations.
Valuation of gift tax
The internal revenue service, has over the years has laid down the clear rules and guidelines in this regard.
When it comes to gifts, yes, the value is determined at the time of the gift. The gift’s fair market value (FMV) is used to establish its worth. FMV is the price that the property would sell for on the open market between a willing buyer and a willing seller at the time of the sale of the product. If $100 is the value exchanged at the time of sale, its FMV is $100.
For non-cash gifts, such as real estate or stock in a closely held (that is, non-publicly-traded) business, the FMV is determined based on various factors like comparable sales, appraisals involving analysis of forecasted cash flows, or financial statements. It’s important to note that in cases where the FMV cannot be easily determined, professional appraisals may be required. being subject to interpretations, moderate value assumptions will help.
In the case of estates, the valuation is definitely determined by the date of the decedent’s death. In some cases, an alternate valuation date six months after the date of death may be utilized. The selected valuation date establishes the value of all assets included in the estate. The FMV of each asset, such as real estate, investments, or personal property, is determined as of that specific date.
The valuation of estates involves the consideration of factors such as market conditions, appraisals, and professional opinions. It is crucial to support the FMV of each asset with a supportable valuation analysis to avoid any potential tax issues.
It’s worth mentioning that there are certain exclusions and deductions available for both gifts and estates, which can help reduce the overall tax liability. However, these exemptions and deductions are subject to specific rules and limits set by the IRS.
Let us recapitulate some facts emphatically on gifts before talking about filing up of gift tax return, Form 709 which will be discussed immediately thereafter.
- Gift tax liability can be eliminated y making gifts that do not exceed the annual exclusion of $19000 for 2025.
- Yes, an unlimited gift tax exclusion for payment of another person’s tuition or medical expenses directly.
Now filing of gift tax in form 709.
A copy of the said form is being reproduced below.
https://www.irs.gov/pub/irs-pdf/f709.pdf
Form 709 (Department of the Treasury Internal Revenue Service) United States Gift (and Generation-Skipping Transfer) Tax Return
This form may be broadly explained as under.
Part 1. named General Information, with details on donor for 21 columns with yes or no column between 18-21.
Part II. Tax Computation with information solicited between 1-20 a -d.
Part III. Spouse’s Consent on Gifts to Third Parties.
Let me introduce you to form 706 (Rev. August 2025) (Department of the Treasury Internal Revenue Service) United States Estate (and Generation-Skipping Transfer) Tax Return. Reproduced below:
https://www.irs.gov/pub/irs-access/f706_accessible.pdf
Let me briefly explain the form for clarity.
Part I Decedent and Executor with 1-14 b columns
Part II Tax Computation with 1-23 d columns
Part III Elections by the Executor with 1-4 columns
Part IV General Information with 1- 17 columns.
Part V Recapitulation with 1- 24 columns
Part VI Portability of Deceased Spousal Unused Exclusion (DSUE) with
Section A—Opting Out of Portability, Section B—Qualified Domestic Trust (QDOT), Section C—DSUE Amount Portable to the Surviving Spouse, and Section D—DSUE Amount Received From Predeceased Spouse(s).
Are there any simple strategies to reduce gift tax/estate tax?
I informed you at the beginning that the taxes are related to 1916-1932 era and have been discussed by experts like CPA, Advocates, or finance planners etc.
Let me give some ideas of the experts.
- Why not gift $15.00 million today for 10 years which works out to be 24.43 million apart from the investments having their own growth which would constitute as capital gains, with the presumption that $ 15.00 million is today’s estate tax exclusion.
- Forming estate trusts to transfer legal title of the property to a trustee who would manage the property. Some of the trusts which are popular are revocable living trust, irrevocable trust, testamentary trust, special needs trust, irrevocable life insurance trust, charitable trust, asset protection trust, spendthrift trust, dynasty trust, and blind trust. Depending upon the requirements of the tax payer, an expert like a CPA, an advocate, or any life planner can suggest the type of the trust for creation and management of the estate planning.
Filing estate and gift tax returns
Let me quote from IRS instructions, on filing of form 706 and form 709.
“Generally, the estate tax return is due nine months after the date of death. A six-month extension is available if requested prior to the due date and the estimated correct amount of tax is paid before the due date.
The gift tax return is due on April 15 following the year in which the gift is made.
For other forms in the Form 706 series, and for Forms 8892 and 8855, see the related instructions for due date information.”
The electronic federal payment system transmits efficiently the payments made to federal authorities and can be referred in future for reference.
American Bar Association has made the following observations.
“Transfers between spouses and to certain trusts for spouses, made during lifetime or at death, may be made without the imposition of any tax. These transfers also do not use any exemption. This is known as the “unlimited marital deduction.”
Only Connecticut currently imposes a state gift tax which indicates that residents of any state, other than Connecticut, that imposes a state estate tax, may be able to significantly reduce or even eliminate their state estate tax at death by making gift transfers during their lifetimes.
These taxes can be particularly complex, time consuming or apply in unexpected ways. In addition, the determination as to which state may tax a particular taxpayer or tax property located within that state regardless of where the taxpayer resides is too complex and requires the guidance from experienced gift tax /estate tax planners.
Conclusion
Gift tax/estate tax stand simplified and U S Tax system stands much clear about its instructions but every state in the nation may change its instructions, either simplify its tenets or adjust them to meet its financial needs from the tax payers. Yes, the federal instructions, over a period of time have undergone vast changes, including inflation adjusting.
An expert handling of gift tax/estate tax issues is highly recommended even by IRS authorities. Hence a brief introduction may hopefully lead to a clearer picture but the tax returns will get the expert handling they deserve.
Caution
Though I tried to explain gift tax/estate tax in the simplest possible way, definitely, the tax returns will be handled by the expert hands of a CPA, an advocate or the one who helped you to establish a trust or currently managing tax matters. I have given neither a tax advice nor a legal consultation.
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