Connection Between Federal Gift Tax and Federal Estate Tax

Unlike most tax structures, the Estate Tax and Gift Tax are unified – integrated – into one tax system. The federal Estate and Gift Tax impose a tax on transferring assets: one tax catches transfers made during your life — the Gift Tax, the other catches transfers at death — the Estate Tax. Transfers while you were alive and at your death are combined and subject to one progressive tax. (The Generation Skipping Transfer Tax, or GST, is an additional wealth tax imposed on transfers that exceed the GST annual indexed exemption amount to family members that are two or more generations below the giver.)

Under federal law, for 2014 –2019, the gift tax and estate tax exemptions are in sync: both have the same basic exclusion amount, though amounts change because the figures are adjusted annually for cost of living increases ($11.4 million in 2019; 11.18 million in 2018, $5.49 million in 2017). If you are married, your spouse is entitled to a separate $11.4 million exclusion. The tax rate for both the estate tax and the gift tax is 40% for 2017–2019.

Gifts made above the annual gift tax exclusion count against your $11.4 million lifetime gift exemption but you owe taxes only when your combined lifetime gifts and transfers made at death exceed $11.4 million. (The Tax Cuts and Jobs Act of 2017 doubled the exclusion amount from $5,000,000 to $10,000,000, before taking into account the required adjustments for cost-of-living. The applicable exclusion in 2019 is $11.4 million, up from $11.18 million in 2018. Starting in 2026, the exclusion amount will revert to pre-2018 levels, also adjusted for inflation.)

There are circumstances in which a sophisticated estate planning attorney will recommend that a person make large gifts that require the payment of Gift Tax during one’s lifetime. In these circumstances the impact of making the large gift and paying Gift Tax earlier results in a significantly lower Estate Tax later. In appropriate circumstances, the combined total of both the earlier Gift Tax and the later Estate Tax would be lower than the Estate Tax alone would have been, with the net effect that the person can pass on significantly higher values to his chosen beneficiaries.

Case Studies: The Connection Between Federal Gift Tax and Federal Estate Tax

Case Study 1: Strategic Lifetime Gifts to Secure Larger Inheritances

John, a successful entrepreneur, sought advice from an estate planning attorney to minimize his future estate tax liability. With the attorney’s guidance, John made strategic lifetime gifts, utilizing the gift tax exemption and taking advantage of the increased exclusion amounts. By paying gift tax earlier, John was able to reduce his estate tax burden in the long run, ensuring larger inheritances for his chosen beneficiaries.

Case Study 2: The Importance of Home Insurance

Sarah, a homeowner residing in a high-risk area, experienced a devastating fire that completely destroyed her house. Fortunately, Sarah had comprehensive home insurance coverage in place. Her insurance policy covered the cost of rebuilding her home, replacing her personal belongings, and providing temporary housing. This case underscores the importance of having adequate home insurance to protect against unexpected losses.

Case Study 3: Navigating Auto Insurance Claims

Lisa, a responsible driver, was involved in a car accident caused by another driver’s negligence. She faced medical expenses, vehicle repairs, and lost wages. With the help of an experienced attorney, Lisa successfully navigated the complex auto insurance claims process. She received compensation for her damages, highlighting the significance of understanding one’s rights and seeking legal assistance when dealing with auto insurance claims.