Federal Estate and Gift Taxation
The unified transfer tax system
Estate and gift taxes share a unified credit and a single graduated rate structure. Know the concepts of gross estate (all property owned at death, including certain lifetime transfers), adjusted gross estate (gross estate less deductions), taxable estate (after the marital and charitable deductions), and adjusted taxable gifts (post-1976 taxable gifts added back to compute the tentative tax, with gift tax already paid credited).
Key inclusions and deductions
Understand the annual gift tax exclusion (per donee, indexed), the unlimited marital deduction, the charitable deduction, and the special-use valuation and family-owned business provisions in general terms. Know that gifts of a present interest qualify for the annual exclusion while future interests generally do not, and that split gifts allow spouses to combine exclusions.
Traps
- Adjusted taxable gifts are added to the taxable estate to compute tentative tax, but gift tax actually paid is credited; forgetting the add-back or the credit is a common error.
- The marital deduction requires property to pass to a qualifying spouse in a qualifying form.
- Transfers within three years of death may be pulled back for certain purposes.
- The estate tax and gift tax share one credit; lifetime gifts consume it.
Worked example
A decedent made $500,000 in taxable gifts in prior years and paid no gift tax because of the unified credit. The tentative tax is computed on the taxable estate plus $500,000 of adjusted taxable gifts, then the unified credit is applied.