CPA REG: Estate and Gift Tax Fundamentals

Estate and Gift Tax for the CPA REG Exam

The federal estate and gift taxes form a unified transfer tax system under IRC Chapters 11 and 12. These taxes apply to transfers of property during life (gifts) and at death (estates). The unified system uses a single rate schedule and a single applicable exclusion amount (also called the unified credit). Understanding these rules is essential for the REG exam.

Gift Tax Basics

The gift tax applies to any transfer of property for less than adequate and full consideration. A gift is complete when the donor relinquishes dominion and control over the property. The value of a gift is the fair market value of the property at the date of the gift. The gift tax is imposed on the donor, not the donee.

The annual exclusion under IRC Section 2503(b) allows each donor to give up to a specified amount per year per donee without incurring gift tax or using the unified credit. This amount is indexed for inflation ($17,000 for 2023, $18,000 for 2024). The annual exclusion applies only to gifts of present interests, not future interests. A present interest is an unrestricted right to the immediate use, possession, or enjoyment of property or income.

Gifts to a Crummey trust qualify for the annual exclusion because the beneficiaries have a temporary withdrawal right that constitutes a present interest. Gifts to a minor's trust under IRC Section 2503(c) also qualify if the trust income and corpus may be expended for the minor's benefit before age 21 and pass to the minor at age 21.

Gift Splitting

Married couples may elect to split gifts under IRC Section 2513, treating each gift as though each spouse made half. This effectively doubles the annual exclusion to the combined amount per donee. Both spouses must consent to gift splitting, and the election applies to all gifts made by either spouse during the year. Gift splitting is elected on Form 709.

Marital and Charitable Deductions

An unlimited marital deduction is available for gifts between spouses, provided the recipient spouse is a U.S. citizen. If the recipient spouse is not a U.S. citizen, transfers must be made to a qualified domestic trust (QDOT) to qualify for the marital deduction. The property must not be a terminable interest, which is an interest that will end upon the passage of time or the occurrence of an event. An exception to the terminable interest rule is the qualified terminable interest property (QTIP) election, which allows the marital deduction for transfers to a trust from which the surviving spouse receives all income for life.

Charitable gift tax deductions are unlimited for transfers to qualifying organizations. The partial interest rule generally prohibits deductions for gifts of partial interests, but exceptions exist for charitable remainder trusts, charitable lead trusts, pooled income funds, and qualified conservation contributions.

Estate Tax Overview

The federal estate tax is imposed on the taxable estate, which is the gross estate minus allowable deductions. The gross estate under IRC Section 2031 includes all property in which the decedent had an interest at death, valued at fair market value. It also includes certain items that do not pass through probate, such as life insurance proceeds (if the decedent held incidents of ownership), jointly held property, powers of appointment property, and transfers within three years of death involving life insurance or certain retained interests.

The executor may elect the alternate valuation date under IRC Section 2032, which values assets six months after death (or at the date of disposition if earlier). This election may be used only if it reduces both the gross estate value and the estate tax liability.

Estate Tax Deductions

Deductions from the gross estate include funeral expenses, administration expenses, debts of the decedent, casualty and theft losses during estate administration, the marital deduction (for qualifying transfers to the surviving spouse), the charitable deduction, and the state death tax deduction. The administration expense deduction may be claimed on either the estate tax return (Form 706) or the estate's income tax return (Form 1041), but not both, under IRC Section 642(g).

Unified Credit and Applicable Exclusion Amount

The applicable exclusion amount is the cumulative amount that can be transferred during life and at death without incurring transfer tax. The TCJA doubled this amount through 2025. The unified credit is the tax on the applicable exclusion amount. Any unified credit used during life for taxable gifts reduces the credit available at death. The concept of portability under IRC Section 2010(c) allows a surviving spouse to use the deceased spouse's unused exclusion amount (DSUE), effectively doubling the exclusion for married couples. The executor must file an estate tax return to elect portability, even if no tax is due.

Generation-Skipping Transfer Tax

The generation-skipping transfer tax (GSTT) under IRC Chapter 13 is a separate tax imposed on transfers to skip persons (individuals two or more generations below the transferor). The GSTT has its own exemption equal to the applicable exclusion amount. Transfers subject to the GSTT include direct skips, taxable terminations, and taxable distributions. The GSTT rate is a flat rate equal to the highest estate tax rate (40%).

Exam Focus Areas

• Calculate the annual exclusion and determine whether gifts qualify as present interests
• Understand the unlimited marital deduction and its exceptions
• Know what is included in the gross estate beyond probate assets
• The unified credit applies to cumulative lifetime and testamentary transfers
• Portability allows the surviving spouse to use the DSUE amount
• GSTT applies at a flat rate to transfers skipping a generation