Lifetime Gift and Estate Tax Exemption: Unified Credit and Portability

For 2026, the lifetime gift and estate tax exemption is $15 million per person. That is the combined amount you can give away during your life and leave behind at death before any federal gift or estate tax is owed. The One Big Beautiful Bill Act, signed on July 4, 2025, set that figure and made it a permanent floor that will adjust for inflation starting in 2027.1Internal Revenue Service. Whats New – Estate and Gift Tax

The word “unified” matters. Lifetime gifts and the estate you leave at death share one exemption, not two. Give away $2 million now and leave $13 million later, and you’ve used the same $15 million as someone who transfers nothing until death. Amounts above $15 million are taxed on a graduated schedule that tops out at 40%.2Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax

How the Unified System Actually Works

The IRS tracks every reportable gift you make during your life. When your estate is eventually settled, the executor adds those cumulative taxable gifts back into the estate, calculates a tentative tax on the combined total, and then subtracts the unified credit. The credit equals the tax that would be owed on transfers up to the full exemption. If your lifetime plus deathtime transfers stay under $15 million, the credit cancels the entire tax and nothing is due.3Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax

The generation-skipping transfer tax runs alongside this system with its own separate $15 million exemption for 2026. It applies when you transfer wealth to grandchildren or others two or more generations below you.

The $19,000 Annual Exclusion Comes First

Before any gift touches your lifetime exemption, the annual exclusion shelters the first $19,000 you give to any one recipient in 2026. There is no cap on the number of recipients. Give $19,000 each to ten different people and none of it counts against the $15 million or requires a return.4Internal Revenue Service. Frequently Asked Questions on Gift Taxes

Married couples each get their own $19,000, so a couple can give $38,000 per recipient per year. They can also elect gift splitting on Form 709, treating a gift made by one spouse as if half came from each. Only the portion of a gift above the annual exclusion counts against the lifetime exemption.

Transfers That Bypass the Exemption Entirely

Some transfers don’t touch either the annual exclusion or the lifetime exemption. They are simply ignored for gift tax purposes.

Grandparents paying a grandchild’s college tuition straight to the university is one of the most underused planning tools available. It moves potentially large sums out of the estate without touching either the annual exclusion or the lifetime exemption.

When You Have to File Form 709

Any gift to a single recipient that exceeds $19,000 in a year triggers a filing requirement, even if no tax is owed. You report it on IRS Form 709, which records the recipient, the date, and the fair market value of the property transferred.10Internal Revenue Service. Instructions for Form 709

Form 709 is due April 15 of the year after the gift. An income tax extension on Form 4868 automatically extends the gift tax return. If you don’t need an income tax extension, Form 8892 gives you a separate six-month extension for Form 709 alone.11Internal Revenue Service. About Form 8892 – Application for Automatic Extension of Time to File Form 709

Filing does not mean you owe. In most cases, the return simply documents that you’ve used a slice of your lifetime exemption. Keep accurate records of every reportable gift, because when your estate is settled the IRS will reconstruct your full gifting history to see how much exemption remains. And filing matters for another reason: when a gift is adequately disclosed on a timely Form 709, the IRS generally has three years to challenge the valuation. Skip the filing and that window never closes, which can produce a dispute decades later when the original parties are no longer around to explain the transaction.

Portability Can Double the Exemption for Married Couples

A surviving spouse can use whatever portion of the deceased spouse’s $15 million exemption went unused. At 2026 levels, a married couple can shield up to $30 million from federal gift and estate tax combined.1Internal Revenue Service. Whats New – Estate and Gift Tax

Portability is not automatic. The executor of the first spouse’s estate must file Form 706 to elect it, even if the estate is nowhere near the filing threshold. Miss this step and the unused exemption disappears for good.12Internal Revenue Service. Instructions for Form 706

Families miss this filing often, usually because the estate was small and no one realized the election existed. Revenue Procedure 2022-32 gives a simplified fix. If the estate was not otherwise required to file Form 706, the executor can file a late return electing portability up to five years after the date of death. The return must include a complete Form 706 with a notation at the top stating it is filed pursuant to Revenue Procedure 2022-32.13Internal Revenue Service. Revenue Procedure 2022-32

Portability has real limits. It covers the federal estate tax exemption only. It does not transfer the generation-skipping transfer tax exemption, so trusts are still needed to plan around GST tax. And it does not apply to state estate taxes.

Why Using the Exemption Isn’t Always the Right Move

The gift tax is only one piece of the tax picture. When you give someone property during your life, they inherit your original cost basis. Buy stock for $50,000, give it away when it’s worth $500,000, and the recipient’s basis for future capital gains is still $50,000.14Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust

Inherited property is different. Assets received through an estate generally get a stepped-up basis equal to fair market value at the date of death. Using the same stock, an heir who received it at death would have a $500,000 basis and could sell immediately with no capital gains tax.

This creates a genuine tension. Giving away highly appreciated assets during life uses the lifetime exemption efficiently but locks in a capital gains bill for the recipient. Holding those assets until death can sometimes produce a better overall result for the family. The right answer depends on the size of the estate, how much appreciation is baked into the asset, and whether the recipient plans to sell.

State Estate and Inheritance Taxes Still Apply

The $15 million figure is federal. Roughly a dozen states and the District of Columbia impose their own estate taxes, and their exemption thresholds are typically far lower, ranging from about $2 million to $7.35 million. An estate that owes nothing federally can still face a state bill.

A smaller group of states levies an inheritance tax, paid by the recipient rather than the estate. Rates and exemptions depend on the recipient’s relationship to the deceased. Close relatives usually pay little or nothing; more distant relatives and unrelated beneficiaries can face rates up to 16%. Maryland imposes both an estate tax and an inheritance tax. State rules do not follow the federal portability framework, so a surviving spouse in a state with an estate tax needs separate planning.