What is the estate tax?
The estate tax is a tax (paid by the deceased person’s estate) on the transfer of property when a person dies. It is different than inheritance tax, which is a tax that must be paid by a person who inherits the property.
There is a federal estate tax. In addition, many states have a separate estate tax. Only a few states have inheritance taxes.
The good news is that the federal estate tax only applies to estates over $5 million (adjusted for inflation to $5,430,000 in 2015). If your estate is under $5,430,000 in 2015, there will be no estate tax on your estate. Some states, such as Minnesota, have lower estate exemption limits (Minnesota is $1,400,000 in 2015). Equally as good, property that is inherited by your heirs and beneficiaries is not considered income, so no income tax will be owed on the property they receive.
What is the gift tax?
If an individual expected his property to be subject to estate tax at death, then he might attempt to avoid the estate tax by giving away property during lifetime that could be subject to such a tax. He could do this by giving all of his property before death to the very same persons who would have inherited it.
Unfortunately, the federal gift tax applies to these transfers.
The federal gift tax was designed to discourage individuals from making lifetime gifts, and, to the extent that he or she still made lifetime gifts, to compensate the government for the loss of estate and income tax revenues that might otherwise result.
Fortunately, however, a person is entitled to give away during lifetime the same amount of property that would have been exempt from federal estate tax at death ($5,430,000 in 2015).
So, in 2015 you may give away up to $5,430,000 during lifetime without owing any gift tax. And, to the extent you do not give away assets during your lifetime, you may transfer them at death up to $5,430,000 before any gift or estate tax would be owed.
For example: Sally gives her $3,430,000 stock portfolio to her daughter, Suzie, during her lifetime, she would not owe any gift tax, but her gift tax exemption would be reduced to $2,000,000 ($5,430,000 – $3,430,000 = $2,000,000). At Sally’s death, Sally’s Will leaves another $3,000,000 of property to Suzie. The first $2,000,000 is covered by her remaining estate tax exemption, but estate tax will be owed on the last $1,000,000.
As of the date of this writing, only one state (Connecticut) has its own state gift tax (Minnesota had a separate gift tax for a short period of time, but that tax was been repealed in 2014).