Wealth Transfer Tax

Wealth transfer taxes apply when assets move between people, either during life (gift tax) or at death (estate tax). Understanding these rules helps advisers recommend tax-efficient strategies for clients with significant assets.

Federal Estate Tax

The federal estate tax applies to the total value of a person's estate at death, but only if it exceeds the per-person exemption.

• Unified credit/exemption (2026): $15,000,000 per individual
• Top estate tax rate: 40% on amounts exceeding the exemption
• Marital deduction - unlimited transfers between spouses (U.S. citizen spouses) are estate-tax-free
• Charitable deduction - unlimited deduction for bequests to qualified charities

Annual Gift Tax Exclusion

The annual gift tax exclusion allows individuals to give a set dollar amount per recipient per year without any gift tax consequences.

• Annual exclusion (2026): $19,000 per recipient per year (no gift tax return required)
• Married couples can split gifts: effectively $38,000 per recipient per year
• Gifts exceeding the annual exclusion reduce the donor's lifetime exemption (unified with estate tax)
• Taxable gifts during life reduce the estate tax exemption dollar for dollar at death

Lifetime Unified Gift and Estate Tax Exemption

The gift tax and estate tax exemptions are combined into a single unified credit.

• 2026 unified exemption: $15,000,000 per individual
• Gifts made during lifetime that exceed the annual exclusion consume part of this unified exemption
• At death, the remaining exemption shelters the estate from tax

Think of it this way: The unified credit is a single bucket. Every dollar of taxable gifts (above the annual exclusion) drains the bucket. Whatever remains in the bucket at death shelters the estate from tax.

Portability (DSUE)

DSUE stands for Deceased Spousal Unused Exemption. It allows a surviving spouse to inherit and use the deceased spouse's unused portion of the estate tax exemption.

• Effectively doubles the exemption for a married couple (up to $30,000,000 in 2026)
• NOT automatic - executor must file an estate tax return (Form 706) for the first deceased spouse to elect portability, even if no tax is owed
• If no Form 706 is filed, the DSUE is permanently lost
• Portability applies to estate and gift tax but does NOT apply to the generation-skipping transfer tax (GST)

Exam Tip: Gotchas

• Portability requires filing Form 706 (estate tax return) for the first spouse to die, even if the estate is below the exemption threshold. If the executor fails to file, the unused exemption is lost forever.

Key Numbers at a Glance

Gift vs. Inheritance: Basis Planning

The tax treatment of an asset's cost basis depends on whether it was gifted during life or inherited at death. This distinction is critical for advising clients on wealth transfer strategies.

Gift of Highly Appreciated Asset

• Recipient takes carryover basis (donor's original cost basis)
• Embedded gain is preserved; the recipient will owe capital gains tax on the appreciation when they sell
• Gift removes the asset from the estate but does NOT eliminate the gain

Hold Until Death

• Asset receives stepped-up basis to fair market value at date of death
• Embedded gain is eliminated entirely
• Stronger from a tax standpoint for highly appreciated assets

Gift to a Qualified Charity

• Donor deducts fair market value of appreciated securities (held more than 1 year), up to 30% of AGI
• Donor pays no capital gains tax on the appreciation
• The charity does not pay tax when it sells the asset
• This is a separate rule set from inter-person gifts: FMV is the donor's deduction, not a carryover basis passed to a recipient

Exam Tip: Gotchas

• Highly appreciated assets: hold until death, do not gift to another person. The stepped-up basis at death eliminates the embedded gain entirely. Gifting to a person preserves the gain through carryover basis.
• Donating appreciated securities to a qualified charity is different. The donor deducts FMV and avoids capital gains entirely, so for clients with charitable intent this often beats both gifting and holding.