Tax Inclusive vs Exclusive

Course: Estate Planning
Lesson 6: Totaling the Gross Estate

Student Question:

Can you please help me understand this question from a review exercise:

Gifts are “tax inclusive” and estates are “tax exclusive” Incorrect. Just the opposite is the case. Gifts are tax exclusive and estates are tax inclusive.

I have the logic that Gifts are Tax Inclusive because the donor pays gift tax and IRS treats that tax payment as part of the gift.

And that Estate Taxes are Tax Exclusive because tax is paid out of the estate and heirs receive whatever is left.

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Instructor Response:

You’re right to be confused here.  It’s very common.  And that’s because the statement is a bit counterintuitive.  Let’s look at both though.

Gifts are tax exclusive.  Why?

With gifts, the donor pays the gift tax separately, in addition to the value of the gift.  So the main point is the tax is paid on top of the gift…from funds separate from the gift.

Estate are tax inclusive.  Why?

With estates, the estate tax is paid from the estate’s total assets.  This means the tax reduces what the heirs receive.  So because the tax is included in the estate value, it’s referred to as tax inclusive.

Does that help clarify?