Estate Tax and Gift Tax Fundamentals

Lesson

Estate tax is a tax on property transfer upon an individual's death, while gift tax is a tax on the transfer of property during an individual's lifetime.

Practice Question #1

Which tax is applied to the transfer of property upon an individual's death?

A) Estate tax

B) Gift tax

C) Income tax

D) Capital gains tax

Select an option above to see an explanation here.

A) Estate tax is applied to property transfer upon an individual's death. B) Gift tax is applied to the transfer of property during an individual's lifetime. C) Income tax is applied to an individual's earned income. D) Capital gains tax is applied to the profit made from the sale of an asset.

Terms

Estate tax:: A tax on property transfer upon an individual's death.
Gift tax:: A tax on property transfer during an individual's lifetime.
Annual exclusion:: The amount of money that can be gifted tax-free each year.
Lifetime exemption:: The total amount of money that can be gifted tax-free over an individual's lifetime.
Marital deduction:: A deduction that allows spouses to transfer unlimited assets to each other without incurring estate or gift taxes.
Taxable estate:: The value of an estate after deductions and exemptions have been applied.
Taxable gift:: The value of a gift after deductions and exemptions have been applied.

Practice Question #2

What is the purpose of the annual exclusion in gift tax?

A) To allow spouses to transfer unlimited assets to each other

B) To reduce the taxable estate

C) To allow a certain amount of money to be gifted tax-free each year

D) To combine with a spouse's exclusion for gift-splitting

Select an option above to see an explanation here.

A) The marital deduction allows spouses to transfer unlimited assets to each other. B) Reducing the taxable estate is a goal of estate planning strategies. C) The annual exclusion allows a certain amount of money to be gifted tax-free each year. D) Gift-splitting is a strategy that allows married couples to combine their annual exclusions.

Do Not Confuse With

Inheritance tax:: A tax paid by the beneficiary of an estate, different from estate tax which the estate itself pays.

Practice Question #3

Which tax is paid by the beneficiary of an estate, rather than the estate itself?

A) Estate tax

B) Gift tax

C) Inheritance tax

D) Generation-skipping transfer tax

Select an option above to see an explanation here.

A) The estate itself pays estate tax. B) The donor of the gift pays gift tax. C) The beneficiary of an estate pays inheritance tax. D) Generation-skipping transfer tax is paid by the donor of a gift to a beneficiary more than one generation younger.

Historical Example

In the early 20th century, estate and gift taxes were introduced in the United States to prevent the concentration of wealth in a few families and generate government revenue. Over the years, the tax rates and exemption amounts have changed, reflecting the government's priorities and economic conditions.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A wealthy individual wants to transfer $1 million to their child. They can use their annual exclusion to gift $15,000 tax-free and apply their lifetime exemption to cover the remaining $985,000. This strategy allows them to transfer the entire amount without any gift tax.