The Unified Gift and Estate Tax System
The United States taxes large transfers of wealth through the unified gift and estate tax system, which taxes lifetime gifts and transfers at death under a single progressive rate structure. The federal estate and gift tax rate is 40% on taxable transfers above the lifetime exemption amount. The lifetime exemption (also called the basic exclusion amount) is $13.61 million per individual in 2024 ($27.22 million for married couples using portability). Transfers within the lifetime exemption face no federal gift or estate tax; transfers above it face 40%.
This very high exemption means that fewer than 1% of estates face federal estate tax. However, the current exemption amounts are scheduled to sunset at the end of 2025, reverting to approximately $7 million per individual (inflation-adjusted from the pre-TCJA level of $5 million) unless Congress acts. This "estate tax cliff" creates urgency for high-net-worth individuals to make large gifts before 2026 if the rollback occurs.
Annual gift exclusions allow taxpayers to give up to $18,000 per recipient per year (2024) completely free of gift tax, without using any lifetime exemption. A married couple can give $36,000 annually to each child, grandchild, or other recipient. This annual exclusion also resets each year — it is a "use it or lose it" exclusion. Special exclusions apply for tuition paid directly to educational institutions (unlimited, in addition to the annual exclusion) and for medical expenses paid directly to medical providers (also unlimited). These direct-payment exclusions are powerful tools for multi-generational wealth transfer outside the gift tax system.