Estate and gift taxes explained: a guide to smarter wealth transfer

By Erik Berge | Senior Wealth Strategist, Citizens Private Wealth

Overview of federal transfer taxes

For families with significant assets, understanding how and when federal transfer taxes may apply is essential to preserving assets across generations. Without proper planning, these taxes applied during life (Gift Tax¹), at death (Estate Tax²) or to "skip" beneficiaries like grandchildren (Generation-Skipping Transfer Tax³), can significantly reduce what heirs receive. Additionally, transfers of cash, real estate, investments, business interests and other property may all be subject to transfer taxes.

How the lifetime exemption and unified credit work together

Federal estate and gift taxes operate under a unified system,⁴ meaning both taxes are subject to the same lifetime exemption, which is $13.99 million⁵ per person in 2025 and increasing to $15 million in 2026 under the One Big Beautiful Bill Act, with annual inflation indexing thereafter. The lifetime exemption determines the unified credit used to reduce or eliminate transfer tax liability. Gifts made during life reduce the available exemption and must be reported by the individual making the gift on Form 709 to track cumulative use. No tax is owed until the exemption is fully used; after that, additional transfers are taxed at a "flat" 40% rate.⁶ At death, any remaining exemption is applied to offset estate tax, with the same 40% rate applying to amounts above the exemption.⁷

Generation-skipping transfer tax

The generation-skipping transfer (GSTT) was created to prevent families from avoiding estate tax by transferring wealth directly to grandchildren or other "skipped" recipients who are typically unrelated to the grantor and more than 37.5 years younger.⁸ The GSTT also applies to estate and gift transfers and follows the lifetime estate and gift tax exemption limits.

When making gifts during life, whether to allocate a GSTT exemption depends on the recipient.

• Gifts to "skip persons": Allocating a generation-skipping exemption is necessary to shield the transfer from GSTT.
• Gifts to non-skip persons (such as children): No generation-skipping exemption allocation is required.
• Gifts to trusts: The generation-skipping exemption allocation may be necessary if the trust names skip persons as beneficiaries or could make distributions to them in the future.

Proper allocation ensures that the gift is protected from both gift tax and GSTT, preserving more wealth for future generations.

Calculating the taxable estate

Determining the taxable estate begins with identifying the full scope of a decedent's assets and applying allowable deductions and exemptions. The taxable estate comprises all assets owned at death, including:

• Real estate, investments, retirement accounts
• Business interests, art, collectibles
• Life insurance proceeds, if the decedent held incidents of ownership⁹

Applicable deductions then reduce the amount of the gross estate. These may include:

• Debts and funeral expenses
• Gifts to qualified charities
• State-level or inheritance taxes paid

What remains is further reduced by the unused portion of the lifetime estate and gift tax exemption. Only the amount exceeding this exemption is subject to federal estate tax. Taxable estates must file a Form 706 Estate Tax Return within nine months of the date of death. Any estate taxes owed are due at this time.¹⁰

A range of strategies can help manage estate tax exposure, gifting, trusts, charitable giving and exemption management:

Coordinating income tax and estate tax planning

With today's historically high lifetime exemptions, fewer estates are subject to estate, gift, and GSTT. As a result, income and capital gains tax strategies have become central to maximizing after-tax wealth transfer. Coordinated planning between benefactors and heirs can help align these strategies.

Lifetime income tax planning strategies:

• Holding appreciated assets until death may be beneficial if the estate falls below the federal exception because heirs receive a step-up in basis that effectively eliminates capital gains tax on prior appreciation. However, tax considerations should not override sound investment principles and long-term financial goals, especially for younger individuals.
• Roth IRA conversions during life can reduce future income tax burdens, particularly when the original account holder is in a lower tax bracket than the heirs. This strategy may be less advantageous if heirs are in lower marginal tax brackets or live in states without income taxes.
• Donating appreciated assets to charity avoids capital gains tax and can reduce income or estate tax liability.
• Using grantor or charitable remainder trusts¹² can help manage tax exposure while maintaining control over distributions and, in certain cases, can provide an income stream from trust assets.

Income tax considerations for heirs:

• Inherited assets receive a "step-up" in cost basis to their fair market value at death¹³, minimizing capital gains tax if sold promptly.
• Most non-spouse beneficiaries must withdraw inherited IRA funds within 10 years under the SECURE (Setting Every Community Up for Retirement Enhancement) Act. Planning withdrawals strategically can help manage income tax brackets.
• Heirs in high-tax states may face significant state income tax on inherited retirement accounts or income-producing assets, making location-based planning important.

Estate planning today: final thoughts

Today's historically high exemptions offer meaningful opportunities for efficient wealth transfer. But effective planning still demands coordination, timing and a clear understanding of how exemptions, taxes and family goals intersect. While the tools are familiar (lifetime gifting, trusts, charitable giving and income tax strategies), their value lies in how they are applied to each family's unique situation. The thoughtful and intentional integration of lifetime and legacy strategies remains one of the most effective ways to preserve wealth.

For additional guidance on strategies for estate and gift taxes, reach out to an experienced wealth manager from Citizens Private Wealth.