Estate and gift taxes exist for one purpose: to tax the transfer of wealth from one person to another. Whether you give money during your lifetime (gift tax) or pass it on after death (estate tax), the IRS wants its share — if the amounts are large enough.
The key phrase is "large enough." The federal estate and gift tax exemption is extraordinarily high — approximately $13.61 million per person (2024). For a married couple, that's roughly $27.22 million. If your estate is below this threshold, you owe zero federal estate tax. The vast majority of Americans will never owe estate tax.
But the exemption is scheduled to be cut roughly in half after 2025 when provisions of the Tax Cuts and Jobs Act expire. And even below the exemption, smart planning around gift tax, step-up in basis, and trust structures can save families hundreds of thousands of dollars.
This guide explains how estate and gift taxes work, when they apply, and the strategies families and their CPAs use to transfer wealth efficiently.
How the Estate Tax Works
When you die, your estate includes the total value of everything you own:
- Cash and bank accounts
- Investments (stocks, bonds, mutual funds)
- Real estate (market value)
- Business interests
- Life insurance death benefits (if you own the policy)
- Retirement accounts (IRAs, 401(k)s)
- Personal property (vehicles, jewelry, art, collectibles)
- Any other assets
The gross estate also includes certain assets you've transferred but retained control over (like revocable trusts) and certain gifts made within three years of death (like life insurance transferred to a trust).
From the gross estate, you subtract:
- Debts and liabilities
- Funeral expenses
- Administrative expenses (executor fees, legal fees, accounting fees)
- Charitable bequests
- Marital deduction (assets left to a surviving spouse — unlimited)
The result is the taxable estate.
If the taxable estate exceeds the applicable exclusion amount (approximately $13.61 million in 2024), the excess is taxed at rates from 18% to 40%, with the top rate applying to amounts over $1 million above the exclusion.
Effective rate: Because of the graduated structure, the effective rate on estates just above the exemption is well below 40%. But for very large estates, the effective rate approaches 40%.
Example: Your estate is valued at $17 million. Exclusion: $13.61 million. Taxable amount: $3.39 million. Estate tax: approximately $1.36 million (roughly 40% of the excess).
Example: Your estate is valued at $10 million. Exclusion: $13.61 million. Estate tax: $0.
How the Gift Tax Works
The gift tax prevents people from simply giving away their estate during their lifetime to avoid estate tax. The gift tax and estate tax are unified — they share the same lifetime exemption.
Annual gift tax exclusion: You can give up to $18,000 per person per year (2024, adjusted annually) without any gift tax consequences. No tax. No filing. No reduction to your lifetime exemption.
A married couple can give $36,000 per person per year ($18,000 from each spouse through "gift splitting").
Example: You have three children and six grandchildren. You and your spouse can give each of them $36,000 per year — that's $324,000 transferred annually with zero gift tax implications.
Lifetime gift tax exemption: If you give more than the annual exclusion to any one person, the excess counts against your lifetime exemption (the same $13.61 million that also applies at death). You must file a gift tax return (Form 709) to report the excess, but you don't actually pay tax unless you've used your entire lifetime exemption.
Example: You give your daughter $118,000 in one year. The first $18,000 is covered by the annual exclusion. The remaining $100,000 reduces your lifetime exemption from $13.61 million to $13.51 million. No tax is due — you're just using part of your exemption early.
Gifts that don't count toward the annual exclusion:
- Payments made directly to educational institutions for someone's tuition (unlimited)
- Payments made directly to medical providers for someone's medical expenses (unlimited)
- Gifts to a spouse who is a US citizen (unlimited marital deduction)
- Gifts to qualified charities (unlimited)
These are powerful planning tools. You can pay your grandchild's college tuition directly to the university — $50,000, $100,000, any amount — without using any of your annual exclusion or lifetime exemption.
The Lifetime Exemption and Portability
The lifetime exemption ($13.61 million in 2024) is shared between gift tax and estate tax. Every dollar you use during your lifetime reduces what's available at death.
Portability: If one spouse dies without using their full exemption, the surviving spouse can claim the unused portion — adding it to their own exemption. A married couple effectively has a combined exemption of approximately $27.22 million.
To claim portability, the deceased spouse's estate must file an estate tax return (Form 706), even if no tax is owed. Many families skip this filing because no tax is due — and lose the portability benefit permanently. Always file Form 706 when a spouse dies, regardless of estate size.
The 2026 sunset: The current high exemption is scheduled to drop to approximately $7 million per person (adjusted for inflation) after 2025 when the TCJA provisions expire. This means families with estates between $7 million and $14 million who currently owe nothing could face significant estate tax starting in 2026.
This sunset creates urgency for high-net-worth families to make large gifts before the exemption decreases.
Step-Up in Basis at Death
This is one of the most valuable provisions in estate planning — and it's not technically part of estate tax.
When you die, your heirs receive your assets with a "stepped-up" cost basis equal to the fair market value at the date of death. All unrealized capital gains during your lifetime are eliminated.
Example: You bought stock for $100,000. At your death, it's worth $1 million. Your heir's cost basis: $1 million. If they sell immediately, their capital gain: $0. The $900,000 in appreciation during your lifetime is never taxed.
This is why many wealthy individuals hold appreciated assets until death rather than selling during their lifetime. The step-up eliminates what could be hundreds of thousands or millions in capital gains tax.
Planning implications:
- Don't gift highly appreciated assets during your lifetime (the recipient gets your low cost basis)
- Do hold appreciated assets until death (heirs get the step-up)
- Don't sell highly appreciated assets shortly before death
- Do gift assets with low appreciation or losses during your lifetime (these don't benefit from step-up)
State Estate and Inheritance Taxes
The federal estate tax exemption is high, but many states impose their own estate or inheritance taxes with much lower exemptions:
States with estate taxes (and approximate exemptions):
- Connecticut: $13.61 million (matches federal)
- Hawaii: $5.49 million
- Illinois: $4 million
- Maine: $6.8 million
- Maryland: $5 million
- Massachusetts: $2 million
- Minnesota: $3 million
- New York: $6.94 million (cliff — if estate exceeds 105% of exemption, entire estate is taxed)
- Oregon: $1 million
- Rhode Island: $1.77 million
- Vermont: $5 million
- Washington: $2.193 million
- District of Columbia: $4.71 million
States with inheritance taxes (tax on the recipient, not the estate):
- Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania
Maryland is the only state with both an estate tax and an inheritance tax.
State tax rates typically range from 1% to 20%. An estate worth $3 million might owe nothing federally but $100,000+ in state estate tax in Massachusetts or Oregon.
If you live in (or own property in) a state with estate or inheritance tax, planning is essential even at wealth levels well below the federal exemption.
Trust Strategies for Estate Tax Planning
Trusts are the primary tool for estate tax planning. They allow you to remove assets from your taxable estate while maintaining various levels of control.
Irrevocable Life Insurance Trust (ILIT)
Life insurance death benefits are income-tax-free to the beneficiary but included in the estate of the policy owner for estate tax purposes. A $5 million life insurance policy could add $5 million to your taxable estate.
An ILIT removes the policy from your estate. You transfer the policy to the trust (or have the trust purchase a new policy). The trust owns the policy. When you die, the death benefit is paid to the trust — outside your estate.
Rules: You must survive at least 3 years after transferring an existing policy to an ILIT (the 3-year rule). Premiums are typically funded through annual gifts to the trust, using the annual gift exclusion.
Grantor Retained Annuity Trust (GRAT)
You transfer appreciating assets to a GRAT and receive annuity payments back over a set term. At the end of the term, remaining assets pass to beneficiaries — potentially with minimal or zero gift tax.
If the assets appreciate faster than the IRS assumed rate (the Section 7520 rate), the excess appreciation passes to beneficiaries tax-free.
GRATs are particularly effective for assets expected to appreciate significantly (private company stock, investments before a liquidity event).
Risk: If you die during the GRAT term, the assets are pulled back into your estate.
Qualified Personal Residence Trust (QPRT)
Transfer your home to a QPRT while retaining the right to live in it for a set term. At the end of the term, the home passes to your beneficiaries at a discounted value for gift tax purposes.
The longer the retained term, the larger the discount — but you must survive the term for the strategy to work.
Intentionally Defective Grantor Trust (IDGT)
An IDGT is irrevocable for estate tax purposes (assets are outside your estate) but "defective" for income tax purposes (you continue to pay income tax on the trust's income). This may sound bad, but the income tax payments further reduce your estate without being treated as additional gifts.
You can sell assets to an IDGT in exchange for a promissory note, transferring future appreciation outside your estate while receiving payments back.
Charitable Remainder Trust (CRT)
Transfer appreciated assets to a CRT. The trust sells them tax-free, invests the proceeds, and pays you income for life (or a term of years). At your death, the remainder goes to charity.
Benefits: Immediate partial charitable deduction, avoid capital gains tax on the sale, receive lifetime income, reduce your taxable estate.
Dynasty Trust
A trust designed to last for multiple generations, transferring wealth without estate tax at each generational transfer. Combined with the generation-skipping transfer (GST) tax exemption (same amount as the estate tax exemption), a dynasty trust can protect substantial wealth for children, grandchildren, and beyond.
Practical Strategies for Different Wealth Levels
Estate under $5 million (individual):
- Primary concern: State estate tax (if applicable)
- Ensure portability by filing Form 706 at first spouse's death
- Use annual gifting ($18,000 per person) to transfer wealth gradually
- Hold appreciated assets for step-up in basis
- Basic will and revocable trust for probate avoidance
Estate $5 million to $13 million:
- Federal estate tax not currently owed, but at risk if exemption drops in 2026
- Consider making large gifts before the exemption sunset
- State estate tax planning may be necessary
- ILIT for life insurance outside the estate
- Annual gifting program
- Charitable planning if philanthropically inclined
Estate over $13 million:
- Federal estate tax is a current concern
- Comprehensive trust planning (GRATs, IDGTs, ILITs, dynasty trusts)
- Large lifetime gifts to use the current high exemption
- Charitable planning (CRTs, foundations, donor-advised funds)
- Family limited partnership or LLC for valuation discounts
- Business succession planning
- Multi-generational planning with GST exemption
All wealth levels:
- Beneficiary designations on retirement accounts and life insurance should be reviewed regularly
- Revocable living trust to avoid probate and ensure smooth asset transfer
- Durable power of attorney and healthcare directives
- Regular review as laws change and family circumstances evolve
The Generation-Skipping Transfer (GST) Tax
The GST tax applies when you transfer assets to someone more than one generation below you (typically grandchildren). It's designed to prevent families from skipping a generation to avoid one round of estate tax.
The GST tax rate is 40% (same as the top estate tax rate) and applies on top of any gift or estate tax. However, you have a GST exemption equal to the estate tax exemption ($13.61 million).
Proper allocation of your GST exemption across gifts and trusts is critical. Wasting GST exemption on the wrong transfers is one of the most expensive estate planning mistakes.
Common Estate Planning Mistakes
Not having a plan at all. Without a will or trust, state law determines who gets your assets. This may not match your wishes, and the probate process is slow and expensive.
Not filing Form 706 for portability. When the first spouse dies, the surviving spouse loses the deceased spouse's unused exemption if Form 706 isn't filed. On a $13.61 million exemption, this can cost millions in future estate tax.
Gifting appreciated assets instead of holding until death. Gifts carry over the donor's low cost basis. Inherited assets get a step-up. Gifting stock with a $10,000 basis and $500,000 value costs the recipient up to $73,500 in capital gains tax (at 15%) that could have been avoided entirely.
Failing to plan for the exemption sunset. If your estate is between $7 million and $14 million, the potential 2026 reduction in the exemption could trigger estate tax that doesn't exist today. Large gifts made now lock in the current high exemption.
Owning life insurance personally. A $2 million policy adds $2 million to your taxable estate. An ILIT costs relatively little to set up and removes the entire death benefit from estate tax.
Not coordinating beneficiary designations. Retirement accounts and life insurance pass by beneficiary designation, not by will. If your beneficiary designations are outdated (ex-spouse still listed, no contingent beneficiary), the assets go to the wrong person regardless of what your will says.
Ignoring state taxes. An estate of $3 million owes nothing federally but could owe $100,000+ in state estate tax in certain states. State planning is essential.
How a CPA Helps with Estate and Gift Tax
Estate and gift tax planning sits at the intersection of tax law, financial planning, and legal structuring. A CPA's role:
Quantifying the exposure. A CPA calculates your estimated estate tax liability under current law and under potential future law (post-sunset).
Optimizing gifting strategies. Annual exclusion gifts, lifetime exemption gifts, tuition and medical payments, and charitable giving — all coordinated for maximum tax efficiency.
Coordinating with estate attorneys. CPAs and attorneys work together — the attorney drafts the legal documents (trusts, wills), and the CPA ensures the tax strategy is optimized.
Filing required returns. Form 709 (gift tax), Form 706 (estate tax), Form 1041 (trust and estate income tax) — all require professional preparation.
Modeling scenarios. What if the exemption drops? What if you make a large gift now? What if you hold vs. sell before death? A CPA models multiple scenarios to find the optimal strategy.
Ongoing monitoring. Tax laws change. Family circumstances change. Asset values change. A CPA reviews your plan periodically and recommends adjustments.
Estate and gift tax planning is not just for the ultra-wealthy. Anyone with a home, retirement accounts, life insurance, and business interests may have an estate larger than they realize — and state estate tax thresholds are much lower than federal.
Find a CPA who specializes in estate and gift tax planning at ListMyCpa.com. Search by state, city, and specialization to connect with a professional who can protect your family's wealth across generations.