What’s the Difference Between Estate and Gift Taxes?

Estate Taxes (a.k.a. the “Death Tax”)

The estate tax is a federal tax on the transfer of wealth at death. However, if your estate is below the lifetime exemption amount, you won’t owe estate taxes. 

• The 2017 Tax Cuts and Jobs Act (TCJA) raised the exemption from $5.5 million to $11.4 million, and it has since been indexed for inflation.
• For 2025, each individual can pass up to $13.99 million (or $27.98 million for couples filing jointly) to heirs without paying an estate tax.
• Anything above that amount may be taxed at 40%, which is much higher than capital gains or income tax rates. 

If your estate is larger than the lifetime exemption amount, planning becomes essential to avoid being taxed on your assets twice. For example, the estate tax is levied against all transferred property over the lifetime exemption it does not matter if this property has already been taxed once or not. 

Gift Taxes

Gift taxes work in concert with estate taxes. They’re designed to prevent people from giving away all their assets before death to avoid estate taxes.

• The annual gift exclusion allows you to gift assets tax-free up to a certain amount each year. For 2025, an individual can give up to $19,000 per recipient.
• If you give more than $19,000, you’ll need to file IRS Form 709. The excess counts against your lifetime estate exemption.
• Married couples can combine their exclusions and give $38,000 per person per year. They will need to elect gift splitting by filing Form 709, but there will be no impact to their lifetime estate tax exemption amount.

How Families Use Gifting to Their Advantage

One of the best strategies for high-net-worth individuals to avoid the 40% estate tax on property over the gift amounts is to use the annual gift exclusion. Taxpayers can gift up to $19,000 to anyone in 2025 completely tax and penalty free. This amount is indexed for inflation and resets annually so that yearly giving is possible. Spouses can also elect to split gifts, which is when they each give part of a gift and get twice the exemption amount.

Example: Jim & Toni:

Jim and Toni, both in their 90s, worry their estate may exceed the exemption. They start gifting stock to their children. By electing gift splitting, they can give each child $38,000 in 2025. They can even gift the same amount to their children’s spouses. This lowers their taxable estate while moving assets out of their portfolio before they grow further, which could raise the value of their estate upon death. Gifting appreciating assets like stocks can also help increase the impact of their giving as such assets should continue to grow over time.

Direct Payments for Your Heirs’ Education and Health

Another overlooked opportunity is to give directly to educational or medical organizations for the benefit of future heirs. These payments don’t count toward your annual gift limit or lifetime exemption. For example, paying $50,000 directly to a grandchild’s college preserves your estate exemption while still helping your family. A similar opportunity is available for qualified, unreimbursed medical expenses if you pay the funds directly to a qualifying medical institution for care.

Recent Law Changes

The One Big Beautiful Bill Act (OBBBA) has made some important updates to both estate and gift taxes:

• The law extended the estate tax exemption and indexed it for inflation. For 2026, it will increase to $15 million for single filers and $30 million for couples.
• It also protected the annual gifting exclusion, ensuring that the gift limits of $19,000 remain in place and are adjusted annually for inflation.
• For the estate tax exemption, it also left portability in place, which allows a surviving spouse to use any unused exemption from their late spouse.

Example: Matt & Audie:

Matt dies in 2025, leaving $5 million to non-spouse heirs. Audie survives him and later dies with $20 million. Thanks to portability, she can add Matt’s unused $10 million exemption to her own $15 million. She can pass $25 million tax-free to her heirs.

Why This Matters for Your Family

While estate and gift taxes have always worked together, recent law changes provide greater clarity about wealth transfer planning strategies:

• Annual gifting can help gradually reduce your estate.
• Direct tuition/medical payments offer tax-efficient support.
• Increased exemptions provide more room to transfer wealth tax-free.

Even if exemptions are reduced in the future, transfers made under today’s higher limits will stay protected. Now is an excellent time to meet with a fiduciary financial advisor to review your estate plan, discuss your family goals, and consider whether trusts or other wealth management strategies make sense.

This presentation is for informational purposes only. The content does not purport to present a complete picture, but Focus Partners believes the information is representative of issues and needs facing some clients. This should not be construed as specific investment, tax, or legal advice. Individuals should seek advice from their wealth advisor or other advisors before undertaking actions in response to the matters discussed.

This represents the opinions of Focus Partners, may contain forward-looking statements, and presents information that may change. All tax laws and regulations discussed are subject to change. Nothing contained in this presentation may be relied upon as a guarantee, promise, assurance, or representation as to the future. Investing involves risk, including, but not limited to, loss of principal. Numerous representatives of Focus Partners may provide investment philosophies, strategies, or market opinions that vary. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. 

This is prepared using third party sources considered to be reliable; however, accuracy or completeness cannot be guaranteed. The information provided will not be updated any time after the date of publication.

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