/estate-gifting

name: estate-gifting
description: "Estate and gifting architecture for wealth management: the unified estate/gift/GST framework, lifetime exemption vs annual exclusion, basis step-up vs carryover, trust taxonomy, and beneficiary planning. Use when the user asks about the 'estate tax exemption', 'annual gift exclusion', 'step-up in basis', a 'revocable trust' or 'irrevocable trust', 'gifting to my kids', '529 superfunding', or the 'portability election'. Also trigger on questions about gift-splitting, Form 706 or Form 709, DSUE, ILITs, GRATs, SLATs, IDGTs, charitable remainder trusts, state estate or inheritance taxes, the SECURE Act 10-year rule for inherited IRAs, whether to gift appreciated stock now or leave it at death, or how to fund estate taxes for an illiquid estate. For income-tax angles of charitable giving (QCDs, donating appreciated securities, DAF bunching), see the tax-efficiency skill."

Estate and Gifting Strategy

Core Concepts

The Unified Estate/Gift/GST Framework

Federal transfer taxes operate as one unified system: lifetime taxable gifts and the estate at death draw down a single lifetime exemption, with a flat 40% tax on transfers above it.

• **Lifetime exemption:** $15 million per person effective 2026 under the One Big Beautiful Bill Act (2025), indexed for inflation thereafter — verify the current-year figure. This made the higher exemption permanent and replaced the scheduled TCJA sunset; the pre-2026 planning frame of "use it before it drops to ~$7M" is obsolete. Urgency-driven exemption-use strategies should be re-evaluated on their standalone merits.
• **Annual gift exclusion:** $19,000 per donor per recipient as of 2025, indexed in $1,000 increments — verify the current-year figure. Exclusion gifts consume no lifetime exemption and require no gift tax return if that is the only gifting.
• **Gift-splitting:** Spouses may elect on Form 709 to treat gifts made by either as made half by each, doubling the effective exclusion per recipient ($38,000 per couple per recipient as of 2025). The election applies to all gifts by both spouses that year.
• **GST tax:** A separate exemption (same dollar amount as the estate exemption) applies to transfers that skip a generation (e.g., to grandchildren or to trusts that will benefit them). GST exemption must be affirmatively allocated (often on Form 709) to shelter trusts intended to last for multiple generations.
• **Filing mechanics:** Gifts above the annual exclusion are reported on Form 709 and reduce the lifetime exemption; no tax is due until the exemption is exhausted. The estate tax return is Form 706.

Portability and the DSUE

A deceased spouse's unused exemption (DSUE) can transfer to the survivor — but only by election:

• The executor must file a **timely Form 706 to elect portability**, even when no tax is due and no return would otherwise be required. A simplified late election (Rev. Proc. 2022-32) is available up to five years after death for estates not otherwise required to file, but relying on it is a fallback, not a plan.
• The survivor's shelter becomes their own exemption plus the DSUE amount. DSUE is frozen at the first death (not indexed afterward), and remarriage followed by the new spouse's death can forfeit a prior DSUE.
• **The GST catch: GST exemption is not portable.** A couple relying solely on portability wastes the first spouse's GST exemption. Families with generation-skipping intent generally need trust planning (e.g., a credit shelter/bypass trust with GST allocation) at the first death, not portability alone.

Step-Up at Death vs Carryover Basis for Gifts

The central gift-or-bequeath tradeoff:

• **Assets transferred at death** receive a basis step-up (or step-down) to date-of-death fair market value, erasing unrealized gains for income tax purposes.
• **Gifted assets carry over** the donor's basis (for gain purposes; for loss purposes the recipient uses the lower of carryover basis or FMV at gift).
• **Rule of thumb:** For estates comfortably under the exemption, hold low-basis appreciated assets until death (free step-up) and gift cash or high-basis assets. For taxable estates, lifetime gifts of appreciating assets remove future appreciation from the 40% estate tax base — often worth more than the forgone step-up. The breakeven depends on estate tax exposure, embedded gain, expected appreciation, and the heir's capital gains rate.
• Gifting loss positions is almost always wrong: the built-in loss can vanish under the dual-basis rule. The donor should sell (harvest the loss) and gift proceeds instead.

Annual Gifting Programs

Systematic use of the free transfer channels:

• **Exclusion gifts:** $19,000 per donor per recipient as of 2025 (see above). A married couple with three married children and six grandchildren can move $456,000 per year ($38,000 x 12 recipients) with no exemption use — compounding over a decade, a material estate reduction.
• **Direct payment of tuition and medical expenses** (IRC 2503(e)) is an unlimited exclusion — not indexed, not capped — provided payment goes directly to the institution or provider, never through the beneficiary. Tuition only (not room, board, or books); medical includes health insurance premiums.
• **529 superfunding:** A donor may elect (Form 709) to treat a lump-sum 529 contribution as made ratably over five years — 5x the annual exclusion at once ($95,000 per donor per beneficiary as of 2025). If the donor dies within the five years, the untaken years' portions are pulled back into the estate.

Trust Taxonomy at Advisor Altitude

What each vehicle is for — advisors should recognize them, not draft them:

• **Revocable living trust:** Probate avoidance, privacy, incapacity management, and smooth multi-state property administration. It provides no estate or income tax savings — assets remain in the grantor's estate. Funding (retitling assets into the trust) is where these plans most often fail.
• **ILIT (irrev