š Introduction
Giving is one of the most rewarding things you can do. But how you giveāduring your lifetime or through your estateācan change the tax bill and the amount your loved ones actually receive. This post breaks down the federal and state rules for lifetime gifts and testamentary gifts, with a special focus on the 2025ā2026 tax year.
š Key Terms & The Unified Federal Exemption
- Lifetime giftĀ ā A transfer of cash, real estate, stocks, or other assets while you are alive.
- Testamentary giftĀ ā A transfer that takes effect upon death, usually through a will, trust, or beneficiary designation.
- Unified credit / Applicable exclusion amountĀ ā The total amount you can transfer (during life + at death) without owing federal estate or gift tax.
The federal gift and estate tax systems are āunified.ā That means every dollar of taxable gift you make during life reduces the amount you can leave free of federal estate tax at death. For 2025, the unified exemption is **27.98 million for married couples). For 2026, the exemption jumps to **
30 million per married couple), indexed for inflation starting in 2027. Anything above the exemption is taxed at 40%.
ā ļø Important: Gifts that qualify for the annual gift tax exclusion (19,000 to as many people as you want each year without filing a gift tax return. Married couples can giftāsplit to give $38,000 per donee annually.
š AtāaāGlance: Lifetime Gift vs. Testamentary Gift
| Factor | Lifetime Gift | Testamentary Gift (at death) |
| Timing | During your life | At your death (via will, trust, or transferāonādeath) |
| Donorās control | Lost at the moment of gift | Retained for life |
| Income tax basis | Carryover basis (donee takes your original cost) | Stepāup in basis (basis = fair market value at death) |
| Estate tax impact | Removes asset and future appreciation from estate | Asset is included in estate |
| Annual exclusion | ā $19,000 (2025 & 2026) per donee | ā Not available |
| Unified exemption | Reduces available exemption | Reduces available exemption |
| Medicaid planning | May cause penalty period | No effect on Medicaid eligibility |
š Federal Law: How Lifetime Gifts Work
Under the Internal Revenue Code (Chapter 12), the donor (giver) is liable for any gift tax, not the recipient. The federal gift tax has three key features:
1ļøā£ Annual Gift Tax Exclusion ā Ā§āÆ2503(b)
In 2025 and 2026, you can give 38,000 per donee.
2ļøā£ Unlimited Exclusions for Tuition & Medical Expenses ā Ā§āÆ2503(e)
Direct payments made to an educational institution for tuition (not books, room, or board) or to a healthcare provider for medical expenses are completely exempt from gift tax, with no dollar limit.
3ļøā£ Lifetime Exemption & Portability
Any gift above the annual exclusion counts against your unified exemption. After you die, your surviving spouse can elect portability to add your unused exemption to their own. The election must be made by timely filing a Form 706 estate tax return. However, portability does not preserve GST (generationāskipping transfer) exemption and provides no creditor protection for the survivor.
š” Pro tip: Use annual exclusion gifts and tuition/medical payments to reduce your estate without ever touching your 15 million (2026) federal exemption.
āļø State Law: Estate, Inheritance & Gift Taxes
Even if you do not owe federal estate tax, your heirs might still owe state death taxes because many state exemptions are much lower. Here are the rules as of 2025/2026.
States With an Estate Tax (Taxed on the estate)
| State | 2025 Exemption | Top Rate | Notes |
| Connecticut | $13,990,000 | 12% | ā Only state with its own gift tax (unified with estate tax). |
| District of Columbia | $4,873,200 | 16% | |
| Hawaii | $5,490,000 | 20% | |
| Illinois | $4,000,000 | 16% | Prior taxable gifts added back. |
| Maine | $6,000,000 (est.) | 12% | Gifts within 1 year of death pulled back. |
| Maryland | $5,000,000 | 16% | Also imposes inheritance tax (see below). |
| Massachusetts | $2,000,000 | 16% | Gifts not added back; lifetime gifting reduces estate size. |
| Minnesota | $3,000,000 | 16% | Gifts within 3 years of death added back. |
| New York | $7,160,000 | 16% | Cliff tax ā 5% over exemption loses entire exemption. |
| Oregon | $1,000,000 | 16% | |
| Rhode Island | $1,802,431 | 16% | Gifts not added back ā allows effective lifetime gifting. |
| Vermont | $5,000,000 | 16% | Gifts within 2 years of death added back. |
| Washington | $2,193,000 | 20% | Qualifying family residence may be excluded for married couples. |
(Source: compiled from state tax authority data)
States With an Inheritance Tax (Taxed on the heir)
| State | Exemptions / Rate Structure |
| Kentucky | Transfers to spouse/parents/children/grandchildren are exempt; others pay up to 16%. |
| Maryland | $1,000 exemption; 10% rate. |
| Nebraska | Up to 15% on remote relatives. |
| New Jersey | $25,000 exemption; 16% rate. |
| Pennsylvania | 0% for spouse & minor children; 4.5% for lineal descendants >21; 12% for siblings; 15% for all others. |
Iowa repealed its inheritance tax effective January 1, 2025.
State Gift Taxes ā Only One State
Connecticut is the only state that imposes a separate gift tax (unified with its estate tax). All other states either follow the federal gift tax rules or have no gift tax at all.
š Multiāstate assets matter: If you live in Florida (no state death tax) but own a vacation home in New York or Connecticut, your estate may owe nonāresident estate tax. A revocable living trust can help avoid ancillary probate.
š° The Tax Basis TradeāOff: Carryover vs. StepāUp
One of the most important ā and overlooked ā differences between lifetime and testamentary gifts is income tax basis.
Lifetime gift ā carryover basis (IRC Ā§āÆ1015)
When you give away an asset, your cost basis goes with it. If you bought a stock for 500,000, the person who receives the gift takes the same
600,000, they pay capital gains tax on $500,000 of appreciation (plus any appreciation that occurred after the gift).
Testamentary gift ā stepāup in basis (IRC Ā§āÆ1014)
When you bequeath an asset, the recipientās basis becomes the fair market value on the date of your death. In the example above, if you die when the stock is worth 500,000 basis. They could sell it immediately for $500,000 and owe zero capital gains tax. Any appreciation that occurred during your lifetime is wiped out for income tax purposes.
š” Rule of thumb: Lowābasis, highly appreciated assets are usually better to hold until death (to get the stepāup). Highābasis assets or cash are great candidates for lifetime gifts because there is little builtāin gain.
š RealāLife Example (2025ā2026 Numbers)
**Alex has 3 million. He wants to pass the wealth to his adult child, Briana.
| Scenario | Tax Consequences | Total Tax |
| š Lifetime Gift (2026 exemption $15M) | No federal gift tax (full | $2.856 million |
| ā°ļø Testamentary Bequest (death in 2026) | Estate tax = 40% Ć ( | $0 |
In this example, holding the stock until death beats lifetime gifting by more than $2.8 million.
ā Other Important Considerations
1ļøā£ Control
- Lifetime gift = you lose control of the asset immediately.
- Testamentary gift = you remain in full control during your life.
2ļøā£ Creditors & Medicaid
- Once you give an asset away, it is generally out of reach of your creditors.
- For Medicaid: gifts made within theĀ fiveāyear lookāback periodĀ can result in aĀ penalty periodĀ of ineligibility. Transferring assets at death does not affect Medicaid eligibility.
3ļøā£ Future Appreciation
- Lifetime gift removes all future appreciation from your estate ā that can save huge estate taxes if the asset skyrockets in value.
- Testamentary gift subjects the full dateāofādeath value to estate tax, but the recipient gets a steppedāup basis on that value.
4ļøā£ Annual Exclusion Gifts ā Still the Gold Standard
Making annual 38,000 per couple) gifts each year to children, grandchildren, or trusts is the most efficient way to move wealth because:
- TheyĀ do not useĀ your lifetime exemption.
- TheyĀ do not require filing a gift tax return.
- Over 20 years, a couple could transfer $760,000 to a single child completely free of gift tax and estate tax.
š® Looking Ahead: 2026 and Beyond
The One Big Beautiful Bill Act (OBBBA), signed in July 2025, increased the 2026 exemption to **1.01 million of taxāfree transfer capacity per person.
š§ Remember: State laws are separate and often have much lower exemptions. Gifting during life can be especially powerful in states like Massachusetts, Rhode Island, and Washington that do not add back lifetime gifts when calculating the taxable estate.
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š ā Introduction
š ā Key terms
š ā Federal law
āļø ā State law
š° ā Tax basis tradeāoff
š ā Realālife example
ā
ā Other considerations
š® ā Looking ahead
š ā Contact
š¢ Hashtags
#EstatePlanning #LifetimeGifts #TestamentaryGifts #GiftTax #EstateTax2026 #UnifiedCredit #StepUpInBasis #CarryoverBasis #AnnualExclusion #PortabilityElection #StateEstateTax #InheritanceTax #ConnecticutGiftTax #OneBigBeautifulBill #OBBB #WealthTransfer #TaxPlanning #MedicaidPlanning #FamilyLegacy #AlanGoldsteinLaw #EstatePlanningAttorney
ā ļø Important Disclosure
Laws change frequently. Federal and state gift, estate, inheritance, and income tax laws are subject to legislative revision, regulatory interpretation, and judicial review. The information in this post is based on laws in effect as of May 2026 (including the One Big Beautiful Bill Act, the IRS 2026 inflation adjustments, and state laws current at that time). You should not rely on this information as legal or tax advice without consulting a qualified professional. Always verify current exemption amounts and filing requirements before implementing any gifting or estate plan.
š Have Questions? Contact Alan Goldstein
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