Federal Transfer Taxes

Federal transfer taxes include estate, gift, and generation-skipping taxes. The federal estate tax applies to the transfer of property at death. The gift tax applies to transfers made while a person is living. The generation-skipping transfer tax is an additional tax on a transfer of property that skips a generation.

Frequently Asked Questions About Federal Transfer Tax

What is the federal estate tax exemption for 2025? For 2025, the federal estate tax exemption is $13.99 million per person ($27.98 million for married couples). This means most people won’t owe federal estate taxes.

What happens to the estate tax exemption in 2026? Starting on January 1, 2026, the exemption will be $15 million per year, adjusted annually for inflation. This is a permanent law not subject to sunsetting.

How does the estate tax work? The executor of an estate must file a federal estate tax return within nine months of a person’s death if that person’s gross estate exceeds the exempt amount. The estate tax applies to a decedent’s estate, which generally includes all the decedent’s assets, both financial (e.g., stocks, bonds, and mutual funds) and real (e.g., homes, land, and other tangible property). It also includes the decedent’s share of jointly owned assets and life insurance proceeds from policies owned by the decedent. The estate tax allows an unlimited deduction for transfers to a surviving spouse and to charity. Estates may also deduct debts, funeral expenses, legal and administrative fees, charitable bequests, and estate taxes paid to states. Any value of the estate greater than the exemption amount is taxed at the top rate of 40 percent. Special provisions reduce the tax, or spread payments over time, for family-owned farms and closely-held businesses. Regardless of size, inheritances are not taxable income to the recipient.

What is the federal gift tax, and how does it work? The federal gift tax applies to transfers during your lifetime that exceed the annual exclusion ($19,000 per recipient in 2025). Gifts above this amount reduce your lifetime exemption. Certain gifts, like those to spouses (if U.S. citizens) and qualified charities, are generally exempt.

How do gift taxes work? Congress enacted the gift tax in 1932 to prevent donors from avoiding the estate tax by transferring their wealth before they died. The tax provides a lifetime exemption that is the same as the estate tax exemption and is integrated with it (i.e., gifts reduce the exemption amount available for estate tax purposes). Beyond that exemption, donors pay gift tax at the same top rate (40 percent) that applies for estate tax purposes. An additional amount each year is also exempted from both the gift tax and the lifetime exemption. This annual exclusion ($19,000 per recipient in 2025) is indexed for inflation and is granted separately for each recipient. Thus, a married couple with three children could give their children a total of $114,000 each year ($19,000 from each parent to each child) without owing tax or counting toward the lifetime exemption. Regardless of size, gifts received are not taxable income to the recipient.

How does the generation-skipping transfer tax work? Congress enacted the GST tax in 1976 to prevent families from avoiding the estate tax for one or more generations by making gifts or bequests directly to grandchildren or great-grandchildren. The GST tax effectively imposes a second layer of tax (using the exemption and the top tax rate under the estate tax) on wealth transfers to recipients who are two or more generations younger than the donor.

How can I reduce my potential estate tax liability? Strategies include making annual exclusion gifts, creating irrevocable trusts, charitable giving, family limited partnerships, and other advanced planning techniques. The best approach depends on your specific situation and should be developed with experienced counsel.

Does California have a state estate tax? No. California does not impose a state estate tax or inheritance tax. However, if you own property in states that do have estate taxes, your estate may be subject to those taxes regardless of your California residency.