Federal Gift and Estate Tax

A Basic Understanding of the Federal Gift and Estate Tax

When clients receive an inheritance, perhaps from the probate of a deceased family member or a distribution from a trust administration, or they want to give property to their kids or other loved ones during their lifetime, they often ask about the gift and estate tax consequences of that inheritance or gift.

Fortunately for Nevada residents, the state of Nevada does not impose a separate gift or estate tax, but rather, the gift and estate taxes are federal taxes imposed on the transfer of wealth. While often discussed together, they are distinct taxes with different implications.

The federal wealth transfer tax system is complicated and complex and includes gift, estate, and generation-skipping transfer taxes. However, the purpose of this article is to provide a very limited overview of the gift and estate tax only. No tax or legal advice is provided in this article and specific tax questions may be directed to your attorney or trusted tax adviser.

What is the Gift Tax?

 A gift tax is levied on the transfer of property from one person to another when equal value is not received in return. It is designed to prevent individuals from avoiding estate taxes by giving away their assets before they die.

• Annual Exclusion: One of the most important concepts in understanding the gift tax is the annual exclusion. In 2024, an individual can gift up to $18,000 per person per year without incurring a gift tax. This means you can give $18,000 to your children, grandchildren, or anyone else without filing a gift tax return.
• Split Gifts: If you are married, you can gift up to $36,000 per person per year without incurring a gift tax, which is referred to as “splitting” the gifts. This means that each spouse is considered to have made half of the gift.
• Gift Tax Return: If you exceed the annual exclusion for a recipient, you (the donor) must file a gift tax return or Form 709. However, this does not necessarily mean you will owe any gift tax. As long as your total gifts are below the lifetime exemption, no gift tax is due. Any gifts over the exclusion amount are deduced from your lifetime exemption amount. In 2024, this exemption amount is $13,610,000 for single individuals and $27,220,000 for married couples.

 What is the Estate Tax?

 An estate tax is imposed on the transfer of property at death. It is a tax on the right to transfer property and not necessarily on the property itself.

• Estate Tax Valuation: In short, to determine the total amount of estate tax due upon a person’s death, the total value of the decedent’s assets are calculated. This includes real estate, stocks, bonds, businesses, and other property, less any deductions, credits, and valuation discounts. These calculations are completed on a Form 706, and while lengthy and complex, an estate tax valuation on Form 706 should only be done by a seasoned attorney or tax adviser.
• Estate Tax Exemption: Similar to the gift tax exemption, there is also an estate tax exemption. This is the amount of property that can pass to heirs without incurring estate tax. In 2024, this amount is $13,610,000 for single individuals or $27,220,000 for married couples. Therefore, if your estate is below these amounts (depending on if you are single or married at the time of your death), you will not owe any estate tax. If not, the estate may be taxed at upwards of forty percent (40%). These amounts are set to sunset back to pre-2018 amounts adjusted for inflation (or roughly half of the current amount) on January 1, 2026.
• Unified Tax Credit: The gift tax lifetime exemption and the estate tax exemption are often referred to as a unified credit. In general, the gift and estate provisions apply a unified rate schedule to a person’s cumulative taxable gifts and taxable estate to arrive at a net tentative tax.  Any tax due is determined after applying the credit based on an applicable exclusion amount.  A key component of this exclusion is the basic exclusion amount.  The credit is first applied against the gift tax, as taxable gifts are made.  To the extent that any credit remains at death, it is applied against the estate tax (see generally https://www.irs.gov/newsroom/estate-and-gift-tax-faqs). For 2024, the applicable tax credit amount is $5,389,800.

Key Points to Remember

• Both the gift and estate taxes are progressive, meaning the tax rate increases as the value of the gifts or estate increases.
• Planning for these taxes can be complex and involves various strategies, including charitable giving, trusts, life insurance, and valuation discounts.
• While Nevada does not levy any inheritance taxes, state-specific estate and inheritance taxes may also apply in certain situations, adding another layer of complexity.
• One important distinction between the gift and estate tax is that if any gift tax is due, it is generally paid by the donor – or giver – of the gift during his or her life and is not paid by the donee – or gift recipient. In contrast, if any estate tax is due, it is paid by the decedent’s estate upon death.
• The gift and estate tax exemption amounts are set to sunset at the end of 2025 and revert back to pre-2018 exemption amounts which, adjusted for inflation, may range between $5,000,000 – $7,000,000 for single taxpayers and $10,000,000 – $12,000,000 for married couples.

PLEASE REMEMBER THAT TAX LAWS ARE SUBJECT TO CHANGE AND THE INFORMATION PROVIDED HEREIN IS INTENDED AS A GENERAL OVERVIEW AND FOR INFORMATION PURPOSES ONLY.

For more information, please feel free to contact an experienced attorney at Robert L. Bolick, Ltd. today!

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