Quick overview
Estate and gift taxes are federal tax regimes that apply to transfers of wealth. Estate tax is levied on the transfer of a decedent’s estate at death; gift tax applies to certain lifetime transfers. The two systems share a common lifetime exclusion (often called the “basic exclusion amount”) so lifetime gifts can reduce what is left available to shelter an estate at death.
This glossary entry explains how these taxes work, who is affected, common planning strategies and pitfalls, and where families should look for authoritative guidance. It is written to educate — not replace personalized tax or legal advice.
Sources and further reading: IRS — Estate Tax and Gift Tax pages (see links inside the article) and FinHelp resources linked below.
How estate and gift taxes work
- Estate tax: When a person dies, the total value of their estate (assets owned at death plus certain transferred interests and pre-death gifts that aren’t otherwise excluded) is calculated. After allowed deductions (debts, funeral costs, qualified charitable deductions, certain marital deductions) and the lifetime exclusion is applied, any remaining taxable estate may face federal estate tax.
- Gift tax: During life, gifts above the annual exclusion per recipient reduce the donor’s lifetime exclusion unless the donor files a gift tax return electing to use other provisions. Gifts between U.S. citizen spouses are generally unlimited (unlimited marital deduction); gifts to noncitizen spouses have a separate annual limit.
Common reporting and forms:
- Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) is used to report and, if applicable, pay federal estate tax. It is normally due nine months after death; the executor can request a six‑month extension using Form 4768.
- Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) reports lifetime gifts and the use of the lifetime exclusion. Even if no tax is payable, Form 709 is required in many cases to preserve tax records (for portability elections and large gifts).
(IRS forms and instructions: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax and https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax)
Exemptions, rates, and the policy context (what families need to watch)
The federal tax code sets two important concepts:
- Annual gift tax exclusion — the amount you can give each recipient each year without using any of your lifetime exclusion or triggering a gift tax return requirement in many cases. This amount is adjusted periodically for inflation.
- Lifetime (basic) exclusion — the total amount a person can transfer (gifted during life and left at death) free of federal estate and gift tax. When gifts exceed the annual exclusion, they reduce the remaining lifetime exclusion unless other planning techniques apply.
Important policy note: the amounts for the lifetime exclusion and the annual gift exclusion change over time. For example, the early-2020s period saw historically high exclusions; those figures may step down in future years unless Congress acts. Always confirm the current-year exclusion amounts on the IRS website before making large transfer decisions. (IRS: Estate Tax and Gift Tax pages.)
Who is most likely affected?
- Most families never pay federal estate or gift tax. The taxes primarily affect higher-net-worth households whose combined lifetime gifts and estates exceed the federal lifetime exclusion.
- Families with closely held businesses, significant real estate holdings, concentrated stock positions, retirement plan assets, or life insurance inside an estate are more likely to fall into taxable ranges or encounter liquidity issues at death.
- State estate or inheritance taxes: independent of federal rules, several states levy their own estate or inheritance taxes with lower thresholds. Check state rules — see our guide on State-by-State Differences in Estate Tax and Probate Processes.
Practical planning strategies (what I do in practice and recommend)
- Start early and document everything. Early gifting, beneficiary designations and property retitling are easier to implement and explain when you plan ahead. Accurate valuation and documentation preserve tax positions at death.
- Use the annual exclusion. Making annual exclusion gifts to multiple recipients over many years is a straightforward way to transfer wealth outside the taxable estate without tapping lifetime exclusion. (See our examples in Gifting Strategies for Income and Estate Tax Efficiency).
- Consider trusts when appropriate. Irrevocable life insurance trusts (ILITs), grantor retained annuity trusts (GRATs), charitable remainder trusts, and other vehicles can achieve estate reduction, income-shifting or charitable goals while addressing liquidity for heirs. See our article on Life Insurance Trusts: Funding Estate Taxes and Providing Liquidity for a focused example.
- Portability: Surviving spouses may be able to use a deceased spouse’s unused lifetime exclusion by electing portability on the estate tax return (Form 706). Portability can preserve a significant tax benefit for married couples, but it requires timely filing and documentation. See our explainer: What is Portability of the Estate Tax Exemption?.
- Use charitable giving strategically. Gifts to qualified charities reduce taxable estate value and can accomplish philanthropic goals. Charitable lead or remainder trusts can also provide tax-efficient transfer mechanisms.
- Plan for liquidity. Estates with illiquid assets (farmland, operating businesses, concentrated stock) may face estate tax bills with illiquid assets. Life insurance or buy-sell arrangements can provide heirs needed cash to pay taxes without selling businesses at distressed prices.
Common mistakes and misconceptions
- “Estate taxes affect everyone”: False. Most estates fall below federal thresholds, but state taxes or special asset types may still cause issues.
- Forgetting to file Form 709: Large lifetime gifts often require Form 709 even if no tax is payable. Missing this can create problems for later basis calculations and portability elections.
- Overlooking basis-step-up mechanics: Income tax basis in inherited assets generally steps up (or down) to fair market value at death for many assets, which affects capital gains when heirs sell. Lifetime gifts transfer carryover basis and can increase future capital gains for recipients.
- Relying solely on dollar figures: Because lifetime exclusion amounts and annual exclusions are adjusted and subject to legislative change (notably scheduled policy sunsets unless Congress acts), plan with flexibility rather than assuming a permanent exclusion level.
Real-world illustration (short)
A couple with concentrated real estate worth $8 million each would appear safe if the lifetime exclusion is high. But if one spouse dies before properly electing portability, or if state estate taxes apply, the surviving spouse could face unexpected tax exposure. In practice I recommend early review of titling, beneficiary designations and a written plan that accounts for possible changes in federal law.
Steps to take now (practical checklist for families)
- Inventory assets: list accounts, titles, beneficiaries, policies and partnerships.
- Review existing wills, trusts, beneficiary designations and corporate documents.
- Meet with an estate planning attorney and tax advisor to model scenarios including portability, gifting, charitable strategies and possible state tax exposure.
- Keep good records for gifts and file Form 709 when required. Maintain appraisals for large gifts and valuations for closely held businesses.
- Revisit plans after major life events (marriage, divorce, birth, death), changes in law or changes in asset size.
Filing deadlines and technical notes
- Estate tax returns (Form 706) are generally due nine months after decedent’s date of death; an extension (Form 4768) can extend the filing date by six months. If tax is owed, penalties and interest apply to late payment.
- Gift tax returns (Form 709) are due on the donor’s normal income tax filing date for the year in which the gift is made.
Where to get authoritative information
- IRS — Estate Tax: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
- IRS — Gift Tax: https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax
- Consumer Financial Protection Bureau and state revenue departments for state-level rules.
Professional disclaimer
This article is educational and does not constitute tax, legal or financial advice. Laws and IRS figures change; consult a qualified estate planning attorney or tax advisor for personalized guidance. In my practice I routinely coordinate between attorneys, CPAs and wealth managers to create plans that address federal and state tax exposure while preserving client goals.
Final note
Estate and gift tax rules are complex but manageable with early planning, careful documentation and coordination among professional advisors. For actionable strategies, review our specialized FinHelp guides on minimizing estate taxes and gifting approaches linked above.
