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.

How Does the Federal Estate Tax Work?

The federal estate tax applies to the taxable estate at death (assets minus debts, expenses, and deductions), but only if it exceeds the per-person exemption.

• Unified credit/exemption (2026): $15,000,000 per individual. This figure is flat for 2026 only; for later years the Internal Revenue Code adjusts it for inflation and rounds the result to the nearest $10,000
• 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

What Is the 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). The Internal Revenue Code adjusts this amount for inflation periodically, so it is not a permanently fixed figure ($18,000 in 2024, $19,000 for both 2025 and 2026)
• 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
• Present-interest requirement - the annual exclusion applies only to a gift of a present interest. A gift of a future interest (the donee cannot immediately use, possess, or enjoy it) does not qualify, regardless of the dollar amount
• Unlimited exclusion for tuition and medical payments - amounts paid directly to an educational institution for tuition, or directly to a medical provider for medical care, are excluded from gift tax entirely, with no dollar limit. This exclusion is separate from, and not reduced by, the annual exclusion

Exam Tip: Gotchas

• A gift only qualifies for the annual exclusion if it is a present interest. A future interest, such as a gift to a trust the beneficiary cannot access immediately, does not qualify no matter how small the dollar amount.
• Tuition and medical exclusions require a direct payment. The check must go straight to the school or medical provider, not to the student or patient, and the exclusion has no dollar limit and does not reduce the annual exclusion.

How Does the Lifetime Unified Gift and Estate Tax Exemption Work?

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

• 2026 unified exemption: $15,000,000 per individual, flat for 2026 only and adjusted for inflation (rounded to the nearest $10,000) in later years
• 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.

How Does Portability (DSUE) Work?

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; the election is irrevocable
• If no Form 706 is filed, the DSUE is permanently lost
• The DSUE is the lesser of the basic exclusion amount or the deceased spouse's actual unused amount, so portability at most doubles the exemption
• Only the last deceased spouse's unused exclusion carries over. A surviving spouse who remarries and outlives a second spouse loses the first spouse's DSUE
• 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.
• Only the most recently deceased spouse's DSUE carries over. A surviving spouse who remarries and outlives the second spouse loses the first spouse's unused exemption, so remarriage can shrink the effective exemption back down.

What Are the Key Numbers to Know?

Gift vs. Inheritance: How Should Basis Drive 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.

What Happens When You Gift a 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
• Special rule for a gifted loss asset: under the Internal Revenue Code, if the donor's basis is higher than the asset's fair market value on the date of the gift (a built-in loss), the recipient must use that lower fair market value, not the donor's basis, to figure a later loss. A donor cannot shift a built-in loss to the recipient at the donor's higher basis
• The donor's original (higher) basis still applies if the recipient later sells at a gain
• If the recipient sells at a price between the gift-date fair market value and the donor's basis, the sale produces neither a gain nor a loss

What Happens If You 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
• This basis reset cuts both ways: a depreciated asset (fair market value below the decedent's basis) held until death is stepped down to fair market value under the same Internal Revenue Code rule, which destroys the unrealized loss rather than preserving it

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.
• Depreciated (loss) assets: sell before death, do not hold until death. The same date-of-death basis reset that erases a gain for an appreciated asset also erases a loss for a depreciated one, stepping the basis down to fair market value. A client holding a loss asset is generally better off selling it during life to recognize the loss than holding it until death and losing it.

What Should You Check on Exam Day?

• Estate and gift tax share one unified exemption: $15,000,000 per individual in 2026, taxed at a top 40% rate above that amount
• The marital deduction (U.S. citizen spouses) and the charitable deduction are both unlimited
• The annual gift exclusion is $19,000 per recipient in 2026 ($38,000 for married couples who elect gift splitting) and requires no gift tax return
• Present-interest gifts qualify for the annual exclusion; future-interest gifts do not, regardless of dollar amount
• Direct payments to an educational institution for tuition or to a medical provider for medical care are excluded from gift tax entirely, separate from the annual exclusion
• Portability lets a surviving spouse use the deceased spouse's unused exemption (DSUE), up to $30,000,000 per couple in 2026, but only the last deceased spouse's DSUE carries over and remarriage can forfeit it
• Filing Form 706 is required to elect portability, even if no tax is owed, and the election is irrevocable; portability does not apply to the generation-skipping transfer tax
• Gifting a highly appreciated asset preserves the embedded gain (carryover basis); holding until death eliminates it (stepped-up basis). But if the donor's basis is above fair market value at the time of the gift (a built-in loss), the recipient must use that lower fair market value, not the donor's basis, to figure a later loss, and a sale price between the two bases produces neither a gain nor a loss
• The date-of-death basis reset cuts both ways: it steps up a gain asset but steps down a loss asset, so a depreciated asset is generally better sold before death, not held until death