Tax Considerations: Gifts, Estates, and Inheritance

Disclosure, risk, and fees cover what a product costs while the customer owns it. Transfer tax covers what happens when the customer gives the product away or dies holding it. The Series 6 candidate must know the unified federal transfer tax system, the 2026 numbers, and the basis rules that distinguish a gift from an inheritance.

What is the unified credit for gift and estate taxes?

The federal transfer tax system is unified. Lifetime gifts and transfers at death draw from a single combined exemption called the unified credit or basic exclusion amount.

• 2026 unified credit: $15,000,000 per individual, indexed for inflation, made permanent by the One Big Beautiful Bill Act
• Married couples effectively enjoy $30,000,000 via portability
• Gifts in excess of the annual exclusion reduce the lifetime unified credit dollar-for-dollar
• At death, the decedent's estate applies the remaining unified credit against the taxable estate; excess above the exemption is subject to estate tax at 40%
• Married couples enjoy an unlimited marital deduction permitting tax-free transfers between spouses during life or at death

Think of it this way: The unified credit is a single bucket that covers both lifetime gifts and transfers at death. Every dollar of taxable gift during life drains the bucket; anything left over at death shelters the estate. The $15,000,000 ceiling is the bucket's total size for a single person in 2026.

Exam Tip: Gotchas

• Gift tax and estate tax share a single exemption. A donor who gives $5,000,000 in taxable lifetime gifts has only $10,000,000 of unified credit left to shield the estate at death.
• The unlimited marital deduction does not eliminate the tax; it defers it. The surviving spouse's estate inherits the exposure. Portability lets the surviving spouse add the deceased spouse's unused exemption to their own.
• The $15,000,000 figure is the 2026 amount. The law is permanent but the amount is indexed; subsequent years will have different numbers. The rep must know the current-year figure.

What is the annual gift tax exclusion for 2026?

The annual gift tax exclusion is a per-recipient, per-year allowance that does not touch the lifetime unified credit.

• Annual gift tax exclusion (2026): $19,000 per donor per recipient per calendar year
• Gifts within the annual exclusion are not reported on a gift tax return and do not reduce the lifetime unified credit
• A married couple can "gift-split": effectively giving $38,000 per recipient per year using both spouses' exclusions (requires filing a gift tax return to elect split treatment)
• 529 plan superfunding: donor may contribute up to 5 times the annual exclusion in a single year and elect to treat it as spread across 5 years for gift-tax purposes
  • 2026 superfunding limit: $95,000 single or $190,000 married per beneficiary
• Lifetime exclusion (the unified credit): $15,000,000 in 2026

Exam Tip: Gotchas

• The annual exclusion and the lifetime credit work together. Gifts within the annual exclusion ($19,000 in 2026) do not touch the lifetime credit. Gifts above the annual exclusion consume the credit.
• 529 superfunding requires a five-year election and no other gifts to the same beneficiary during that period. The donor files Form 709 in the year of contribution to elect the five-year spread. Additional gifts during the five years complicate the calculation.
• Gift-splitting requires a Form 709 filing by both spouses. Even if each spouse individually gave under the annual exclusion, the election to split triggers the filing requirement.

How are gifted securities taxed under carryover basis?

When a donor gives appreciated securities to a donee, the donee takes carryover basis.

• Cost basis: the donor's original cost basis carries over to the donee
• Holding period: the donor's holding period also carries over to the donee
• Adjustment for gift tax paid: the donee's basis may be increased (but not above fair market value) by the portion of gift tax attributable to the appreciation in the gifted asset
• Special rule for losses: if the fair market value (FMV) on the gift date is less than the donor's basis, the donee uses a dual basis:
  • Gain basis = donor's carryover basis
  • Loss basis = FMV on gift date (lower)
  • If the donee later sells between these two values, no gain or loss is recognized
• Practical effect: a donor gifting highly appreciated securities transfers the embedded capital gain to the donee; the donee pays the tax on the full appreciation when sold

Real-world example: A parent bought mutual fund shares 20 years ago for $10,000. Today they are worth $50,000. The parent gifts the shares to an adult child. The child's basis is $10,000 (carryover); the child's holding period starts 20 years ago. If the child sells immediately at $50,000, the child owes tax on the full $40,000 gain.

Exam Tip: Gotchas

• Gift of appreciated securities transfers the embedded gain. The donee inherits both the low basis and the holding period. The parent who wants to avoid the tax does not achieve that through a gift.
• The dual-basis loss rule prevents gifting losses to shift them to another taxpayer. If FMV on gift date is below the donor's basis, the donee cannot claim a loss on sale between those two values.

How does step-up in basis work for inherited securities?

Step-up in basis is the most powerful tax benefit in the Internal Revenue Code for appreciated securities held at death.

• Inherited securities receive a new basis equal to the fair market value on the decedent's date of death (or the alternate valuation date, 6 months later, if elected by the executor)
• Holding period: automatically long-term, regardless of how long the decedent held the security
• Practical effect: all appreciation during the decedent's lifetime is erased for income-tax purposes; heirs who sell immediately at FMV owe zero capital-gains tax on the lifetime appreciation
• Not available for securities held inside tax-deferred accounts (Traditional Individual Retirement Account (IRA), 401(k), variable-annuity accumulation value); these retain ordinary-income character and no step-up applies to the beneficiary

Gift vs. inheritance planning trade-off:

• Gifting transfers future appreciation out of the estate but gives the donee a carryover basis
• Holding until death keeps the asset in the estate but gives the heir a step-up in basis
• The right choice depends on the donor's estate size (vs. unified credit) and the asset's appreciation history

Think of it this way: Gifts carry the tax forward with the asset. Inheritance erases the lifetime gain. For a highly appreciated security in a customer's taxable brokerage account, holding until death is usually the better tax outcome if the estate is below the unified credit.

Exam Tip: Gotchas

• Gifts get a carryover basis; inherited securities get a step-up. This is one of the most-tested tax planning concepts on Series 6. A customer holding a highly appreciated mutual fund position generally gets better tax treatment for heirs by holding until death (step-up) than by gifting during life (carryover basis + potential estate-inclusion).
• Tax-deferred retirement accounts do NOT get a step-up in basis. Beneficiaries pay ordinary income tax on distributions from inherited retirement accounts. This is why estate planners often prioritize using taxable account appreciation (step-up) and spending down retirement account balances first.
• The variable annuity death benefit during accumulation is ordinary income to the beneficiary on the gain portion. No capital-gains treatment, no step-up, no LTCG rate. This is a frequent misconception compared to a mutual fund held in a taxable brokerage account (which gets a full step-up).

How do gift and estate tax rules apply to Series 6 products?

Exam Tip: Gotchas

• The SECURE Act imposes a 10-year payout on most non-spouse inherited IRAs. The 10-year rule replaced the old "stretch IRA" for most beneficiaries; the entire inherited balance must be distributed within 10 years of the decedent's death.
• Inherited variable annuities do not get step-up; the beneficiary pays ordinary income on the gain portion. A beneficiary who expects the same LTCG treatment they would get on an inherited mutual fund will be surprised at tax time.