Federal Estate Taxes & Gift Taxes

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If you are rich enough your estate will pay a 40% tax above the exemption


Under the federal estate taxes and gift taxes laws, the amount that one gives away during one’s lifetime counts toward the entire exclusion from estate and gift taxes. The lifetime estate and gift tax exclusion is now at $5 million per person indexed for inflation. For  2014 the exclusion is $5,340,000 per person.  There is a federal estate tax of 40% of the net asset value of the estate over 5,340,000. Thus, if a person dying in 2014 has $6,340,000 in net asset value, he would have $1 million taxable and the tax would be $400,000. Under the unified tax concept, the exclusion is reduced for whatever gifts are made over and above the annual gift tax exclusion amount. Thus, one cannot escape estate taxes by giving away once estate prior to death.


Federal Estate Taxes – A federal estate tax return, known as form 706, is due nine months after the date of death. That form reports the entire inventory of the persons estate and whatever deductions are allowable to come up with a net taxable amount. If the net amount is under $5,340,000, then there is no tax.  Properties are reported on the form 706 at their date of death values which must be substantiated by appraisals. Because any properties owned by a person at death received a step up in income tax basis to the date of death values, people often file the form 706 for estates that are under the taxable amount just to establish the date of death values.


Federal Gift Taxes – A federal gift tax return, known as form 709, is due April 15 of each year to report the gifts of the previous year. There is an annual exclusion from gift tax and gift tax reporting in the amount of $14,000 (this is the 2014 amount which is indexed for inflation) per donor per donee per year. This means that a husband and wife can give $28,000 per year to one child and the under the exclusion. That $28,000 would not count against the $5,340,000 lifetime exemption from estate and gift taxes.  In addition to the annual gift tax exclusion, there is an unlimited gift tax exclusion allowed for amounts paid on behalf of a donee directly to an educational organization, provided such amounts constitute tuition payments. Amounts paid for books, dormitory fees or board on behalf of the donee are not eligible for the unlimited exclusion.  Likewise, amounts paid directly to healthcare providers for medical services on behalf of a donee also qualify for the unlimited gift tax exclusion. Both the medical and tuition exclusions are available without regard to the relationship between the donor nor and donee.  Thus, a grandmother could pay the entire tuition for college of her granddaughter and could also pay the entire tuition for college of neighbor’s daughter and those payments would fall under the annual unlimited gift tax exclusion.


Gifts to legally recognized charitable organizations are a deduction from the taxable estate for estate and gift tax purposes. Thus, in the example above, if somebody dies in 2014 with a $6,340,000 estate, but as part of their will or trust they leave $1 million to charity, then the net taxable estate becomes $5,340,000 and there is no tax because of the exemption.


Due to the large annual exclusions and lifetime exclusions estate and gift tax issues are not of concern to most people. The main thing to be aware of is the step up in income tax basis at death which is best reported on a federal estate tax return so that there is no question as to the values.