Gift Tax

Without a gift tax, wealthy individuals could simply give away everything before death and sidestep the estate tax entirely. Congress addressed this by creating a gift tax that mirrors the estate tax structure — both share the same lifetime exemption and are said to be "unified." Gifts above the annual exclusion and above the remaining lifetime exemption are taxed at rates set by law.

An important nuance: unlike the estate tax, the gift tax is paid by the giver, not the recipient. This creates an asymmetry that families sometimes evaluate. If a hypothetical matriarch pays gift tax out of her own assets to transfer wealth to her children, the tax itself further reduces her taxable estate — a dynamic sometimes described as the gift tax being "tax-exclusive" compared to the estate tax being "tax-inclusive." The arithmetic can favor large lifetime gifts in certain circumstances.

Gifts generally do not receive the step-up in basis that inherited assets do. A recipient typically takes the giver's original cost basis, which may carry a large embedded taxable gain. Families weighing lifetime gifts against bequests at death often encounter this trade-off and need qualified tax counsel to model the full picture across both transfer taxes and income taxes.