Gift, estate, and generation-skipping transfer (GST) taxes are taxes on the transfer of wealth. Understanding these taxes and how they are calculated is essential for estate planning. This lesson covers the fundamentals of gift, estate, and GST tax compliance and calculation, including the applicable rates, exemptions, and filing requirements.

The Gift Tax

The gift tax is a tax on transfers of property during life. The transferor (donor) is responsible for the tax. The gift tax is designed to prevent individuals from avoiding estate tax by transferring assets before death.

Annual Exclusion

Each year, a donor can give a certain amount to each recipient without incurring gift tax. The annual exclusion amount is adjusted for inflation. For 2023, the annual exclusion is $17,000 per recipient. Gifts up to the annual exclusion are not subject to gift tax and do not count against the lifetime exemption. The annual exclusion applies to gifts of present interests, meaning the recipient has immediate access to the gift.

Lifetime Exemption

The lifetime exemption (also known as the unified credit) is the amount an individual can transfer during life or at death without incurring federal estate or gift tax. The lifetime exemption is unified, meaning it applies to both gifts and estates. For 2023, the exemption amount is $12.92 million per individual ($25.84 million for married couples). Gifts in excess of the annual exclusion reduce the lifetime exemption.

Taxable Gifts

Gifts in excess of the annual exclusion and lifetime exemption are subject to gift tax. The gift tax rate ranges from 18% to 40%. The tax is paid by the donor, not the recipient. The gift tax return is filed on Form 709.

Valuation of Gifts

The value of a gift is the fair market value of the property at the date of the gift. For publicly traded securities, this is the average of the high and low prices on the date of the gift. For real estate or closely held businesses, a professional valuation may be required.

Gift Splitting

Married couples can elect to split gifts, treating a gift from one spouse as made equally by both spouses. This allows couples to effectively double the annual exclusion and use both spouses’ lifetime exemptions. Gift splitting is only available to married couples.

The Estate Tax

The estate tax is a tax on the transfer of property upon death. The estate is responsible for the tax. The estate tax applies to the total value of the estate minus deductions, including the marital deduction and charitable deductions, and minus the lifetime exemption.

Gross Estate

The gross estate includes all property owned by the decedent at death, including real estate, investments, business interests, life insurance proceeds, and retirement accounts. The gross estate also includes certain transfers made during life, such as gifts within three years of death.

Deductions from the Gross Estate

• Marital Deduction: The value of property passing to a surviving spouse is generally deductible from the gross estate. This deduction is unlimited for US citizen spouses. For non-citizen spouses, the deduction is limited.

• Charitable Deduction: The value of property passing to qualified charitable organizations is deductible from the gross estate.

• Debts and Expenses: Debts, mortgages, funeral expenses, and estate administration expenses are deductible.

• State Death Tax Deduction: State death taxes are deductible.

The Taxable Estate

The taxable estate is the gross estate minus deductions. The estate tax is calculated on the taxable estate after applying the lifetime exemption.

Portability

Portability allows a surviving spouse to use any unused portion of the deceased spouse’s lifetime exemption. This effectively allows married couples to transfer up to two times the exemption amount free of estate tax. Portability is available for estates of decedents dying after 2010.

The Generation-Skipping Transfer Tax (GSTT)

The GSTT is a tax on transfers to beneficiaries who are two or more generations younger than the transferor (e.g., grandchildren). The GSTT is in addition to the gift or estate tax. The GSTT has its own exemption amount, which is equal to the estate tax exemption amount.

GSTT Exemption

The GSTT exemption allows individuals to transfer a certain amount of assets to skip persons without incurring GSTT. The exemption amount is the same as the estate tax exemption amount. For 2023, the GSTT exemption is $12.92 million per individual.

GSTT Tax Rate

The GSTT rate is equal to the highest estate tax rate, which is currently 40%. The tax is imposed on transfers that exceed the GSTT exemption.

Filing Requirements

Gift Tax Return (Form 709)

A gift tax return must be filed for any year in which the donor makes gifts in excess of the annual exclusion. The return is due on April 15 of the year following the gift. Even if no tax is due, a return may be required to report gifts that reduce the lifetime exemption.

Estate Tax Return (Form 706)

An estate tax return must be filed for estates that exceed the lifetime exemption amount. The return is due nine months after the date of death, with a possible six-month extension. Even if no tax is due, a return may be required for portability purposes.

GSTT Return (Form 706-GS or 709)

A GSTT return may be required for transfers to skip persons. The specific form depends on the type of transfer.

Tax Rate Schedules

The gift and estate tax rates range from 18% to 40%. The rates are applied to the cumulative taxable transfers (lifetime gifts and estate) after applying the unified credit.