Estate & Gift Tax Basics (2025)

Overview

Estate and gift taxes are transfer taxes (not income taxes). They share a unified lifetime exemption. The decedent's estate or living donor may owe tax on transfers above the exemption.

2025 Key Numbers

Gift Tax — Annual Exclusion

Gifts up to $19,000 per recipient per year (2025) are excluded. Above $19,000: counts against lifetime exemption or pay gift tax.

Excluded from gift tax (unlimited):

• Payments directly to educational institutions for tuition (any relationship)
• Payments directly to medical providers for medical care (any relationship)
• Gifts to spouse (if US citizen — unlimited marital deduction)
• Gifts to political organizations
• Charitable gifts

Gifts to non-citizen spouse: NOT unlimited — limited to the $190,000 annual exclusion (2025). Excess counts against lifetime exemption or pays gift tax.

Married couples — gift splitting: Spouses can elect to split gifts — each treated as giving half — so together they can give $38,000 per recipient (2025) with no reporting. Both must consent (non-donor spouse signs consent on donor's Form 709). In community-property states, a gift from community funds is already 50/50.

Form 709 — Gift Tax Return

File if gifts to any individual exceed $19,000 (except excluded gifts), OR if splitting gifts with spouse, OR if giving a future interest to anyone (other than US-citizen spouse). Due April 15 (with Form 1040; Form 4868 extends gift return too if no tax owed; Form 8892 separately extends 6 months). Can be e-filed. Only information return — no tax due unless lifetime limit exceeded.

Future interest gifts: cannot use the annual exclusion (only present-interest gifts qualify).

Estate Tax — Decedent's Final Affairs

Personal Representative Duties

1. Apply for estate EIN (Form SS-4)
2. File Form 56 (notice of fiduciary relationship)
3. File decedent's final Form 1040
4. File estate's Form 1041 (if income ≥$600)
5. File Form 706 (estate tax return) if gross estate + adjusted taxable gifts exceeds $13,990,000
6. Pay any estate tax due (generally 9 months from date of death)
7. Distribute assets to beneficiaries only AFTER tax obligations satisfied

Gross Estate Includes

• All property owned at death (real estate, bank accounts, investments, business interests)
• Life insurance proceeds (if decedent owned the policy)
• Certain transfers made during life (within 3 years of death)
• Jointly owned property (decedent's share)
• Annuities and retirement benefits

Deductions from Gross Estate

• Funeral expenses
• Administrative expenses (executor fees, legal fees, court costs) — may instead be deducted on Form 1041, but NOT both
• Debts of decedent (mortgages, credit cards, taxes owed)
• Marital deduction (unlimited for property passing to surviving US-citizen spouse)
• QDOT: if surviving spouse is NOT a US citizen (even if a US resident), unlimited marital deduction is NOT allowed — BUT property passing to a Qualified Domestic Trust (QDOT) for the non-citizen spouse qualifies for the marital deduction
• Charitable deduction (unlimited for property passing to qualified charities)
• State death tax deduction

Not deductible: federal estate tax paid, post-death alimony paid (treated as distribution to beneficiary), property tax (unless accrued before death under state law).

Basis Step-Up for Inherited Property

Property inherited from a decedent gets a basis = FMV at date of death (or alternate valuation date 6 months later; or special-use valuation for closely-held farm/business; or decedent's adjusted basis for qualified conservation easement). This is the "step-up" (or step-down) — heirs can sell immediately with minimal gain. Automatically long-term holding period.

Alternate valuation date: 6 months after death; only if both estate value AND estate tax are lower than at date of death. Assets distributed within 6 months → valued at distribution date FMV.

Jointly-owned property: decedent's share included in gross estate unless co-owner contributed to purchase. For spouses (joint tenants with right of survivorship / tenants by entirety): half the value included in estate; that half gets step-up, other half keeps surviving spouse's cost basis (minus depreciation). Community property (community-property states): half included in estate, but the entire community property value gets stepped up.

Exception: Property transferred within 1 year of death and then re-transferred back to original owner loses step-up.

Generation-Skipping Transfer (GST) Tax

Closes the loophole of transferring wealth to grandchildren (or anyone >37.5 years younger than the transferor). GST applies to:

• Direct skips (gifts/legacies to skip persons)
• Taxable distributions from trusts to skip persons
• Taxable terminations (when interests end and pass to skip persons)

GST exemption = $13,990,000 (2025, unified with estate/gift). Top rate 40%. Direct payments to educational/medical institutions for a skip person's tuition/medical care are exempt from BOTH gift tax and GST (no reporting, any amount).

Form 706 — Estate Tax Return

Required if gross estate + adjusted taxable gifts > $13,990,000 (2025). Due 9 months from date of death (6-month extension available). Portability (DSUE) election must be made on a timely-filed Form 706 — even if below the filing threshold, you MUST file Form 706 to elect portability. Assessment period: 3 years from due date (4 years for estate transfers).

Portability (DSUE — Deceased Spousal Unused Exclusion)

Surviving spouse can use the deceased spouse's unused exemption after a timely Form 706 portability election, even if no estate tax return was otherwise required. A surviving spouse who is both a nonresident and noncitizen generally cannot use DSUE except as permitted by treaty; citizenship alone is not the test. The DSUE amount becomes the surviving spouse's additional exclusion for lifetime gifts or their own estate.

Example: Husband dies in 2025 with $3M estate (no tax due). Wife files Form 706, elects portability. Husband's unused exemption: $13,990,000 − $3,000,000 = $10,990,000. Wife now has her own $13,990,000 + $10,990,000 = $24,980,000 for her future estate/gifts.

Nonresident Alien Decedents

An NRA decedent's estate files Form 706-NA if US-situated assets exceed $60,000 at death (much lower threshold than for US citizens/residents).

Decedent's Final Return & Estate Tax (Form 1041)

Rule

When someone dies, two separate tax filings may be needed:

1. Form 1040 (Final Return) — reports the decedent's income from January 1 to date of death. Due April 15 of the following year. Uses the decedent's SSN. A surviving spouse can file jointly for that year. Full standard deduction and credits apply — death year is NOT a short tax year (decedent gets full year's standard deduction regardless of how long they lived).

2. Form 1041 (Estate Income Tax Return) — reports income earned after death until the estate is settled. The estate is a separate taxpayer with its own EIN. Filed by the personal representative (executor/administrator). Due 15th day of the 4th month after the estate's tax year ends (auto-extended 5.5 months via Form 7004).

The date of death is a hard cutoff. Income earned before = return of the dead person. Income earned after = return of the estate.

Authority

• IRC §691 — Income in Respect of a Decedent (IRD)
• Pub 559 — Survivors, Executors, and Administrators
• Form 1040 — Decedent's final individual return (SSN)
• Form 1041 — Estate's income tax return (EIN)
• Form 56 — Notice Concerning Fiduciary Relationship
• Form 1310 — Statement of Person Claiming Refund Due a Deceased Taxpayer
• Form SS-4 — Application for EIN (for the estate)

The Two-Return System

          Date of Death
     ←────────|────────→
   1040        |      1041 (Estate)
  (Decedent's  |    or Beneficiary's
   SSN)        |    1040 (if passed
               |    directly)

The Personal Representative (Who Files Form 1041)

The executor (named in the will) or administrator (appointed by court if no will) files Form 1041 for the estate. They:

• Apply for the estate's EIN using Form SS-4
• File Form 56 with the IRS to declare their fiduciary status
• File Form 1041 each year the estate holds income-producing assets
• Are personally liable for taxes due if assets are distributed before paying IRS

Estate Filing Requirements

A decedent's estate must file Form 1041 if:

• Gross income for the tax year ≥ $600
• Any beneficiary is a nonresident alien (any amount of income)

Estate & Trust Exemption Deductions (2025)

Who Gets the Income — IRD Rules

Per IRC §691(a)(1), income earned after death but attributable to rights the decedent had while alive goes to:

1. The estate — if the right to receive the income is acquired by the estate
2. The beneficiary — if they acquire the right directly (joint tenancy, trust, named beneficiary)

The character of income is preserved (§691(a)(3)) — rental income stays Schedule E, interest stays interest, etc. The receiving party reports it the same way the decedent would have.

Key Forms & Deadlines

The estate can choose a fiscal year (not necessarily calendar year) — common to pick a year ending on the anniversary of death to minimize returns.

Edge Cases

• Qualifying revocable trust (QRT) — Under §645, a revocable living trust can elect to be treated as part of the estate for the first 2 years after death. One Form 1041 covers both, simplifying filing.
• No executor appointed — If no will and no court-appointed administrator, the person in actual possession of the decedent's property may be considered the fiduciary and must file.
• Surviving spouse joint return — Can file jointly for year of death. After that, surviving spouse files as Qualifying Surviving Spouse (first 2 years) or Head of Household/Single.
• Medical expenses paid after death — Deductible on the estate's Form 1041 OR the final Form 1040 (if paid within 1 year) — but not both.
• Estate distributes income to beneficiaries — The estate deducts distributions (Schedule B). Beneficiaries report the income on their own 1040s via Schedule K-1.

Common Traps

• Using decedent's SSN after death: After the final 1040, never use the decedent's SSN for income. The estate needs its own EIN. 1099s issued under the decedent's SSN must be split ("nominee distribution").
• Missing the $600 threshold: Even small estates with bank interest or a few months of rental income may cross $600 gross income — triggering a filing requirement. Many executors miss this.
• Double-filing medical expenses: Medical bills paid by the estate can't also be claimed on the final 1040. Pick one.
• Forgetting Form 56: Required to establish you as the fiduciary. Without it, the IRS may not recognize the estate filing.
• Penalty for distributing assets before paying tax: If the executor distributes estate funds to beneficiaries before paying the IRS, the executor is personally liable for the unpaid tax.

Connected Rules

• Income After Death — IRD — What counts as IRD and how it's reported
• Basis Step-Up at Death — Inherited property gets FMV basis
• Filing Status — Qualifying Surviving Spouse — Available for 2 years after year of death

Scenarios Worked

• Jiro rental properties: Income before death → final 1040. Income after death → estate's Form 1041 (or beneficiary's 1040).