Gifts Added Back to Estate at Death

Course: Estate Planning
Lesson 5: Transfer Taxation II Lifetime Transfers

Student Question:

If the gift tax is paid what is the need to add the gift back to the estate at death? is that not double taxation?

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Instructor Response:

It certainly feels that way, doesn’t it?  But it’s really not.

If I give away say $1million in taxable gifts during my life, I am using part of my lifetime exemption in so doing.  When I die, that $1 million gets pulled back into my estate on paper only so the IRS can apply the estate tax brackets correctly and subtract the exemption that’s already used.  In other words, if a transfer during life (gift) was subject to the gift tax when made, the estate gets a credit for that, so it doesn’t get taxed twice.

Student Response:

Will you pay gift tax on the $1 million? Or is the amount put back into the estate only gifts for which no gift tax was paid?

Instructor Response:

Yeah, so here’s a breakdown:

Gifts that are added back to estate:

• Taxable gifts for which you used your lifetime exemption

Gifts that ARE NOT added back to estate:

• Gifts within the annual exclusion
• Gifts you actually paid the gift tax on at that time

Does that help clarify?

Student Response:

Absolutely! And it makes logical sense.