Estate Tax and Gift Tax
The federal estate tax is a tax on the transfer of assets at death, while the gift tax applies to certain transfers during your lifetime. For 2025, the combined estate and gift tax exemption is $13.99 million per individual. Assets above this exemption are taxed at rates up to 40%. This historically high exemption is scheduled to decrease significantly after 2025 without legislative action.
The federal estate tax applies to the value of a deceased person's taxable estate that exceeds the applicable exemption amount. For 2025, the estate tax exemption is $13.99 million per individual, or effectively $27.98 million for a married couple using portability. The top estate tax rate is 40% on amounts above the exemption. Due to the historically high exemption, the vast majority of estates do not owe federal estate tax.
The gift tax is a companion to the estate tax that applies to certain transfers of assets during your lifetime. You may give up to $19,000 per recipient per year in 2025 (the annual gift tax exclusion) without any gift tax consequences or need to file a gift tax return. Gifts above the annual exclusion reduce your lifetime estate and gift tax exemption. The annual exclusion is a separate, use-it-or-lose-it amount that does not carry over from year to year.
A critical planning consideration is the scheduled reduction of the estate tax exemption. The Tax Cuts and Jobs Act of 2017 roughly doubled the exemption, but this provision is set to sunset after 2025. Without new legislation, the exemption could drop to approximately $7 million per individual (adjusted for inflation) in 2026. This potential change has prompted many people with estates above the projected future exemption to explore gifting strategies before the sunset.
Pennsylvania does not have a state estate tax, but it does impose an inheritance tax. The Pennsylvania inheritance tax rate varies based on the relationship of the beneficiary to the deceased: 0% for transfers to a surviving spouse, 4.5% for transfers to direct descendants (children, grandchildren), 12% for transfers to siblings, and 15% for transfers to other beneficiaries. This tax applies regardless of the size of the estate and is separate from the federal estate tax.
Estate tax planning strategies may include making lifetime gifts, establishing irrevocable trusts, utilizing charitable giving strategies, and ensuring proper use of the marital deduction and portability election. The complexity of these strategies generally warrants working with an estate planning attorney and a qualified financial planner or tax advisor.
Why This Matters
While the current federal exemption shelters most estates from federal tax, the scheduled sunset of the higher exemption after 2025 could bring many more families into estate tax territory. Additionally, Pennsylvania's inheritance tax applies regardless of estate size. Understanding these taxes and their thresholds may help you take timely action to preserve more of your wealth for your heirs.
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