Estate & Gift Tax Exemption: What is it?

August 26, 2025

Many people are surprised to learn that giving away money isn’t always tax-free—at least not in the eyes of the IRS. Transfers of wealth, whether during your lifetime or at death, can trigger gift or estate taxes. The good news? Current tax laws provide generous exemptions that can significantly reduce or even eliminate these taxes when planned properly.

What Are the Estate and Gift Tax Exemptions?

The federal estate and gift tax exemption allows you to transfer a substantial amount of wealth without paying federal taxes. For 2025, this exemption is set at $13.99 million per person. The lifetime gift tax exemption is the same amount, meaning you can give up to $13.99 million during your life or upon death without incurring federal tax.

On January 1, 2026, the exemption is scheduled to rise to $15 million per person. Married couples can take advantage of portability, which lets a surviving spouse use any unused exemption from their deceased spouse. This provision allows couples to shield $27.98 million in 2025 and $30 million in 2026 from federal estate taxes.

Understanding Portability

Portability is an IRS provision available only to legally married couples. If one spouse passes away without using their full exemption, the surviving spouse can claim the unused amount by filing IRS Form 706—even if no tax is due. This election ensures both spouses’ exemptions are fully preserved. Additionally, assets transferred under the marital deduction receive a step-up in cost basis at each spouse’s death, potentially reducing future capital gains taxes.

However, simply leaving everything to a surviving spouse might create a larger taxable estate later. Coordinating the use of the marital deduction with each spouse’s lifetime exemptions often results in better long-term tax savings.

Federal vs. State Taxes

Some states impose their own estate or inheritance taxes, which may apply even if no federal tax is due. Where you live and where you own property can significantly impact your estate plan, making it essential to review state-specific rules.

How the Exemption Works

When someone dies, the IRS values their entire estate—real estate, investments, business interests, cash, and personal property. If the total is below the exemption amount, no federal estate tax applies. If it exceeds the limit, only the amount above is taxed, at rates up to 40%.

Because the estate and gift tax exemption is unified, lifetime taxable gifts reduce what you can pass on tax-free at death. For instance, gifting $3 million during life lowers your remaining exemption to $10.99 million in 2025.

Maximizing the Exemption

There are two main ways to use these exemptions effectively:

Lifetime Gifting:

●     Use the lifetime gift tax exemption to transfer wealth during your lifetime, reducing your future taxable estate.

●     Take advantage of the annual gift tax exclusion—up to $19,000 per recipient in 2025 (or $38,000 for married couples)—without touching your lifetime exemption.

●     Consider 529 plan front-loading, where you can contribute up to five years’ worth of annual exclusions at once.

Estate Planning at Death:

●     Any unused exemption applies to your estate at death, but your executor must file Form 706 to claim it.

●     If married, electing portability ensures the surviving spouse benefits from both exemptions.

Final Thoughts

The estate and gift tax exemptions are powerful tools for preserving family wealth and ensuring a smoother transfer to heirs. By combining lifetime gifting, strategic use of exemptions, and careful estate planning, you can potentially save millions in taxes for your beneficiaries.

Sources:

https://www.fidelity.com/learning-center/personal-finance/what-is-the-estate-tax-exemption

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.