Estate Planning, 13th Edition, Dalton
Introduction to Estate Planning
Basic Estate Planning Documents
Property Interests
Probate
Gift Tax
The Critical California Context: State vs. Federal
No California Gift Tax: Crucially, California does not have a state-level gift tax. A gift made by a California resident is subject only to Federal gift tax rules.
No California Estate Tax: California also has no state estate tax, meaning your planning focuses exclusively on the federal limits.
The Mechanics: Who Pays, What is a Gift?
Who Pays? The Donor (the giver) is responsible for the gift tax. The Donee (the recipient) generally does not owe income tax on the gift itself (though they pay income tax on any earnings the gift generates later, like dividends or interest).
Definition of a Gift: It is the transfer of property to an individual or entity for less than full and adequate consideration in money or money's worth. This includes money, real estate, stock, business interests, and even selling property below market value.
The Two Key Exclusions: The federal system provides two primary mechanisms to allow tax-free wealth transfer: the Annual Exclusion and the Lifetime Exemption.
A. The Annual Gift Tax ExclusionThis is the "free pass" your clients get every year to make gifts without any tax consequences or reporting requirement.
Key Feature: The exclusion is per donee, per year. A client can give the annual exclusion amount to an unlimited number of people (children, grandchildren, friends, etc.) without reducing their Lifetime Exemption or filing IRS Form 709.
Use-It-or-Lose-It: The annual exclusion does not roll over.
B. The Lifetime Gift and Estate Tax Exemption (The Unified Credit)This is the cumulative amount an individual can transfer during life (gifts) and at death (estate) without paying the 40% federal transfer tax.
How They Interact: Any gift to a single donee in a year that exceeds the Annual Exclusion is a Taxable Gift. This amount does not trigger an immediate tax payment, but it reduces the Donor's remaining Lifetime Exemption.
Example: In 2025, a client gives a child $50,000. The first $19,000 is covered by the Annual Exclusion. The remaining $31,000 is a Taxable Gift that reduces the client's $13.99 Million Lifetime Exemption.
Filing Requirement: Any time a gift exceeds the Annual Exclusion, the donor must file IRS Form 709 to report the gift and track the reduction in their Lifetime Exemption, even if no tax is due.
Advanced Planning Consideration: Basis Step-Up
The most important tax trap you must counsel clients on is the Lost Step-Up in Basis:Gifted Asset: When a client gifts a highly appreciated asset (like stock or real estate), the donee receives the Donor's original, lower cost basis (carryover basis). If the donee later sells the asset, they face a potentially large capital gains tax.
Inherited Asset: If the same client holds the appreciated asset until death, the beneficiary receives a new basis equal to the fair market value at the date of death (stepped-up basis). This often wipes out all capital gains accrued during the decedent's lifetime.
Your Rule of Thumb: Counsel your clients to gift assets with high basis (or cash) to use their exclusions, and to hold assets with low basis (highly appreciated) to get the basis step-up at death.
Estate Tax
The Federal Estate Tax is not a tax on the heir, but a tax on the decedent's right to transfer property at death.
The Unified Transfer Tax System (The Big Picture)
The estate tax is fundamentally linked to the Gift Tax through the Unified Credit.
The Exemption Amount: The most critical number. This is the total value an individual can transfer (via gifts during life and assets at death) free of federal transfer tax.
2025 Exemption: For example, in 2025, this amount is $$$13.99 million per individual (adjusted annually for inflation).
The Gift Tax Connection: Taxable gifts made during life (gifts above the Annual Exclusion) reduce the Exemption Amount available at death. They are a single, unified system.
Gross Estate and Taxable Estate
Gross Estate: This includes the fair market value (FMV) of everything the decedent owned or controlled at the date of death. This includes obvious assets (real estate, cash, stocks) but also assets passing outside of a will or trust, such as:
Life insurance policies where the decedent was the owner.
Retirement accounts.
Assets held in revocable trusts.
Taxable Estate: This is the Gross Estate minus allowable deductions. Key deductions include:
Marital Deduction: An unlimited deduction for assets passing to a U.S. citizen surviving spouse. This is why a married couple can defer all estate tax until the second death.
Charitable Deduction: An unlimited deduction for assets passing to qualified charities.
Debts, funeral expenses, and administrative costs.
Tax Rate: The top marginal rate for the Federal Estate Tax is currently 40%.
Key Planning Opportunities for Married Couples
Portability: The surviving spouse can elect to claim the deceased spouse's unused exemption (known as the Deceased Spousal Unused Exclusion - DSUE). This must be elected on a timely filed federal estate tax return (Form 706), even if no tax is due.
Marital Deduction & Deferral: Most married couples structure their estates to use the Unlimited Marital Deduction to defer all estate tax until the death of the second spouse. Proper planning then focuses on utilizing both spouses' exemptions.
The California Context
Here's a critical fact for your California clients:
California has NO State Estate Tax or Inheritance Tax.
While this is great news, be aware of two other crucial California-specific tax areas that frequently drive estate planning:
California Property Tax (Prop 19): Transfers of real estate to children or grandchildren may trigger a property tax reassessment, drastically increasing property taxes unless strict rules (related to principal residence and capped value) are met. This is often a greater concern than the federal estate tax for the average California client.
Capital Gains Tax (Basis Step-Up): Inherited assets receive a "step-up in basis" to the fair market value at the date of death. This is one of the most powerful tax benefits in the U.S. tax code, eliminating all accumulated capital gains on appreciated assets.
Transfers: Life and/or at Death
Trusts
Charitable Giving
Unlimited Marital Deduction
Life Insurance in Estate Planning
Special Elections and Postmortem Planning
Generation Skipping Transfers
Basic Estate Plan