How lifetime gifts interact with state death taxes

By Richard C. Wilson

Research notice: Based on primary sources linked below. Use official state figures and forms for the applicable death or gift date. Dates governing Connecticut's cumulative gifts and credits, Iowa's repeal and the federal annual exclusion appear in the collapsed Sources. Ask an estate attorney or CPA to confirm a filing decision, retained right or tax calculation before acting.

Gift taxes and death taxes use separate state rules

In Rhode Island, official guidance describes estate tax as a transfer tax on estate value before distribution. In Maryland, inheritance tax concerns the privilege of receiving property passing from a decedent with Maryland taxable situs, subject to the Tax General Article: inheritance tax exemptions. These named examples do not establish identical tax bases in every state.

Start a gift review with separate questions about the transfer, any gift tax, and the eventual estate or inheritance tax review. Put the gift documents beside prior returns rather than treating a single return as the complete planning file.

Connecticut counts specified lifetime gifts

Connecticut's taxable estate includes cumulative Connecticut taxable gifts made by the decedent during calendar years beginning on or after the starting date identified in Sources, except gifts includable in the federal gross estate.

Gather the decedent's Connecticut gift returns and identify gifts already included in the federal gross estate. For separate gift tax coverage, filing requirements and applicable figures, consult Connecticut DRS: Estate and Gift Tax Information.

Separate gift tax payments from gift value

Connecticut separately adds Connecticut gift tax paid by the decedent or estate on gifts made by the decedent or spouse during the three years preceding death. Resident and nonresident estates also receive a credit against estate tax for Connecticut gift tax previously paid by the decedent during life. The credit concerns Connecticut taxable gifts made in calendar years beginning on or after the credit starting date in Sources.

Keep three entries in the review file: the cumulative gift value, the specified gift tax payments and the lifetime tax payments supporting the credit. Ask the preparer to trace each entry to its return and payment record.

Washington reports specified gift taxes

Washington's Schedule G instructions require gift taxes paid or payable by the decedent or estate on gifts made by the decedent or spouse within three years before death. The gift date controls this period, rather than the date the tax was paid. The instruction concerns the specified gift taxes and does not establish an addition of every recent gift.

For the Washington review, pair each relevant gift record with the record of tax paid or payable. Ask the preparer to identify both the donor and the person responsible for the tax. The broader question of outright gift treatment belongs in a separate review of Washington's applicable guidance.

Pennsylvania and Iowa: retained interests and the death date

Pennsylvania: review the rights retained

Bring deeds, trust terms and occupancy arrangements to the review. The retained interest answer explains Pennsylvania's rule and its limits.

Iowa: check the death date first

Iowa inheritance tax does not apply to deaths on or after the repeal boundary identified in Sources. The decedent's death date controls that boundary. For an earlier death, request the applicable historical guidance before evaluating any lifetime transfer or retained interest.

Federal rules: gift completion, recent transfers, valuation and records

A federal gift of property, a portion or an interest is complete when the donor relinquishes dominion and control so completely that no power remains to change its disposition for the donor's benefit or another person's. A reserved disposition power may leave the transfer wholly or partly incomplete, depending on the facts. Examine the terms and scope of every reserved power. Gift completion alone does not resolve estate inclusion.

Federal rules for specified recent transfers

The federal three year transfer rule includes property interests transferred, or powers relinquished, within three years ending at death when retention would have caused gross estate inclusion under IRC §§2036, 2037, 2038 or 2042. Bona fide sales for adequate and full consideration in money or money's worth are excluded from that transfer rule.

For these purposes, a transfer from a trust portion treated under IRC §676 as owned by the decedent by reason of a power in the grantor is treated as made directly by the decedent. That ownership determination disregards IRC §672(e). The rule also applies for IRC §2038.

A separate federal rule increases the gross estate by federal gift tax paid under chapter 12 by the decedent or estate on gifts made by the decedent or spouse within the three years ending at death. These provisions do not include every completed gift merely because it occurred during that period.

Valuation and records

For federal gift valuation, property is valued at the gift date. Fair market value is the price between a willing buyer and willing seller, neither compelled to transact and both knowing the relevant facts.

Persons subject to federal chapter 12 taxation must keep permanent books or records establishing total gifts, subject to the annual exclusion limitation, allowable deductions and other information required on the gift return. Donors must retain all documents and vouchers used to prepare the return so they are available for inspection when required.

For a business interest, bring the transfer agreement, ownership records, valuation materials and any retained power provisions to the review. Ask the adviser to identify unresolved valuation questions before making a tax saving comparison. Detailed business valuation methods and gift credit calculations belong in their own professional review.

Pennsylvania one year exclusion and the federal annual exclusion

Pennsylvania's Schedule G instructions address lifetime transfers made without valuable and adequate consideration in money or money's worth. For those transfers made within one year of death, the instructions allow a $3,000 exclusion per transferee per calendar year to the extent the transfers exceed $3,000 in value. This Pennsylvania exclusion is not indexed. It neither establishes every Pennsylvania exemption nor guarantees exclusion after one year.

For the federal calendar year identified in Sources, the annual gift exclusion is $19,000 per donee, per year, for present interests only. Combine gifts to the same person during that calendar year when applying the exclusion. Future interests are excluded from this allowance, and this federal taxable gift exclusion is not a universal state death tax exclusion. The federal amount is adjusted annually for inflation and rounded down to the next $1,000.

For U.S. citizens or residents, federal gift return filing and eventual tax payment are separate questions. A filing obligation can exist even when no gift tax is ultimately due. Use the applicable Form 709 instructions for the complete filing tests and exceptions.

Check the official guidance for the gift date and death date. Keep the relevant edition with the records rather than relying on an amount recalled from an earlier planning conversation.

Common questions