How the federal estate and gift tax system works

Lifetime gifts and exclusions

Federal gift tax applies to gifts of property wherever situated by U.S. citizens and residents, subject to exclusions and deductions. For gift tax, residence means domicile at the time of the gift.

A transfer by an individual for less than adequate and full consideration is a gift to the extent the property's value exceeds that consideration.

The annual exclusion covers qualifying present interest gifts up to the applicable limit, separately for each donor, each recipient and each calendar year. Future interests do not qualify. A separate annual limit applies to present interest gifts to a spouse who is not a U.S. citizen, only when the gift would qualify for the marital deduction if the spouse were a citizen.

Tuition paid directly to a qualifying educational organization for someone's education or training, and medical care payments made directly to that person's provider, are qualified transfers. They are not gifts for gift tax purposes and fall outside the annual exclusion.

The taxable estate and the shared exclusion

The taxable estate is the gross estate minus the deductions allowed by the estate tax deduction provisions. Adjusted taxable gifts enter a later part of the estate tax computation, rather than this subtraction.

For U.S. citizens and residents, estate and gift taxes share the basic exclusion amount through a credit against tax. A surviving spouse's applicable exclusion also includes any deceased spousal unused exclusion available under a portability election.

Portability requires the executor to compute the unused exclusion and elect it on a timely estate tax return, including extensions. The election is irrevocable, and the amount comes from the last deceased spouse.

The portable amount is the lesser of the basic exclusion amount or that spouse's unused amount. The portability guide also covers relief for late elections.

The separate GST exemption

Each individual has a separate generation skipping transfer tax exemption equal to the basic exclusion amount. Deceased spousal unused exclusion does not increase it, and this exemption is not portable.

The individual or executor may allocate it to property for which the individual is the transferor. An allocation, once made, is irrevocable.

Two terms to know

Basic exclusion amount is the shared estate and gift tax exclusion for U.S. citizens and residents, applied through a credit against tax.

Domicile for gift tax means living in a place with no definite present intention of leaving. Living there without that intention is insufficient, and intending to change domicile without actually moving does not change it.

EstatePlanner.com resources to open next

• How lifetime gifts and the annual exclusion work

  Open this guide when your next question concerns a planned gift. It focuses on the annual exclusion introduced above.

• How gift tax returns document transfers and valuations

  Use this guide to continue into gift reporting, disclosure and valuation records. It also covers gift splitting and elections.

• How GST exemption is allocated to trusts

  Continue here for the separate GST planning track. The guide covers exemption allocations and estate tax inclusion periods.

• Federal transfer tax records and questions checklist

  Use this checklist to organize a conversation about the gifts and estate records discussed here. Keep it beside your prior returns as you prepare questions for your advisers.

A perspective on starting the conversation

"So I would just encourage all the listeners, if they haven't had a conversation with their estate planning attorney, or they've put off estate planning like most Americans, just 'cause they don't want to think about it,"

Common questions