Estate & Gift Tax

There are always ways to plan to reduce, or even eliminate Estate Tax (the tax that is due when you die, commonly called “death tax”).  In addition, with a proper plan, the use of Gifting can be a powerful tax savings technique.  There is, however, a lot of misinformation about this area of the law, and you are well served to seek good legal and tax advice before you take action.

What are Death Taxes?
Separate from the expense and delay of probate, your estate may also be liable for “death taxes”, which is the common term for federal estate tax and California’s estate tax, known as a “pick-up” tax. The pick-up tax is equal to a credit given by the federal government for the payment of state death taxes attributable to assets located in California. In essence, the gross estate tax due is fixed and California merely takes a share of the federal tax. But, if you own assets, such as real property, in another state, that state will take a percentage of the “pick-up” tax and California will take the balance. Please note that some states assess a separate inheritance tax, over and above and “pick-up” tax.

Will My Estate Owe “Death Tax”
Every person in the United States has a credit which may be applied to either federal gift tax or federal estate tax. That Unified Transfer Credit (UTC, also known as the “applicable credit amount”) will pay the transfer tax on both lifetime gifts and assets passing at death. Essentially, this means that when you die, every individual can pass a certain amount of assets (the Exclusion)  to their heirs, free of estate tax (death tax). Congress continues to the change the law with regard to the amount that can pass free of estate tax, but as of of January 1, 2013, they made the estate tax “permanent”. This essentially means that every U.S. citizen or legal resident may leave $5,000,000.00 to their heirs, adjusted for inflation.

When your spouse dies, you can inherit an unlimited amount from your spouse (provided you are a US citizen) with no estate tax due. The estate tax is due only on the second death of a married couple, or at the death of a single person.

1998 $625,000.00    55%
1999 $650,000.00    55%
2000 $675,000.00    55%
2001 $675,000.00    55%
2002 $1,000,000.00    50%
2003 $1,000,000.00    49%
2004 $1,500,000.00    48%
2005 $1,500,000.00    47%
2006 $2,000,000.00    46%
2007 $2,000,000.00    45%
2008 $2,000,000.00    45%
2009 $3,500,000.00    45%
2010 Estate Tax Repealed for One Year
2011 $1,000,000.00    55%
2013 – ? $5,000,000.00    40%

If the value of your estate is less than $2,000,000 at your death, and you die after 2006, and you made no taxable gifts during your lifetime, no federal estate tax will be due.

How Much can I Gift Each Year without Paying Taxes?
Some individuals wish to provide outright gifts to their heirs, commonly to be used to purchase a vehicle, a down payment on a home, or for a wedding (but could be for other uses). This can be achieved through the use of their annual gift exclusion,which is currently $14,000 per donee (in other words, you give $14,000 to as many people as you wish).

Assuming that this amount will not be adequate for a specific purpose (such as helping a child purchase a home), a portion of the lifetime gift tax credit may be used, however, this is not the best use of this credit. Ideally, an individual should use their gift tax credit to transfer a highly appreciated asset. This ensures that any future appreciation on the asset will avoid estate tax. The current lifetime gift tax credit is $5,000,000/donor, adjusted for inflation. In other words, an individual can give up to $5,000,000 in gifts, during their lifetime, without incurring a gift tax. These gifts will, however, reduce the individual’s estate tax exemption.

Also remember that an individual can pay for qualified tuition costs and for medical expenses of other individuals, without limitation. This can be an excellent tool if you want to pay for a child or grandchild’s college education.


  • Achieves significant gifting for home ownership or other purposes;
  • Removes the amount given from the donor’s estate;
  • No gift tax.


  • Uses a portion of the lifetime gift tax credit, which may not be an efficient use of the credit;
  • Once the gift is made, it cannot be revoked.


You are married with two adult children.  Your children could use assistance in purchasing homes.  You have two options:

  • You could loan each of them the down payment on their home, in whatever amount you choose, and then forgive the loan at the rate of $28,000 each year (or if you want to make the gift to their spouse as well, you could forgive another $28,000 for their spouse each year…for a total of $56,000/year). This would assist them in obtaining a home, and you would be forgiving the debt yearly, using your annual gift tax exclusion, thus it will not impact the amount you can leave when you die. This has the added benefit of removing the amount loaned from your own estate and thus, when you die, there is no estate tax due on this amount.
  • You can simply give them the down payment on the home. If, for example, you give each of your children $400,000, you can apply this amount against your estate tax exemption. Therefore, when you two die, instead of being able to leave $10,000,000 (adjusted for inflation) to your heirs estate tax free, that amount will instead be $9,200,000 because you gave away $800,000 during your lifetime. The benefit is that the amount you gave away during life did not continue to grow inside your estate, and thus become taxable on death.

Does the Beneficiary of a Gift Pay Tax on the Gift?

No.  The only person who would pay a gift tax is the giver, not the receiver.  The giver will only have to pay gift tax if the giver gives more than the annual exclusion amount ($14,000.00) or more than the lifetime gift tax credit ($5,000,000.00).  A gift tax return, however, may be required.

CIRCULAR 230 NOTICE: In accordance with recently enacted Treasury Regulations, we are required to notify you that any tax advice given herein (including attachments) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of
(1) avoiding any penalties that may be imposed by any governmental taxing authority or agency or (2) promoting, marketing or recommending to another person any tax related matter.