It may be surprising to learn but giving away money is not always free—at least, not according to the tax code. Transfers of money and property at death could be subject to the estate tax. Giving away money while you’re alive could be subject to the gift tax. But there is good news. The law currently allows for a hefty estate and gift tax exemption and lifetime gift tax exemption.
What is the estate and gift tax exemption?
The estate and gift tax exemption is the amount of an individual’s estate that can be transferred to heirs tax-free upon death. In 2025, this exemption is set at $13.99 million per person. The lifetime gift tax exemption is also $13.99 million, meaning you can give away up to that amount during your life or at death without incurring federal taxes.
The federal estate and gift tax exemption is slated to increase to $15 million per person on January 1, 2026.
For married couples, the combined exemption can reach $27.98 million in 2025, thanks to a provision known as portability. It will increase to $30 million in 2026.
What is portability?
For legally married couples only, portability is a provision that allows a surviving spouse to inherit any unused portion of their deceased spouse’s federal estate and gift tax exemption. This means that if one spouse dies and doesn’t use their full 2025 $13.99 million exemption, the surviving spouse can add the unused amount to their own exemption—potentially protecting up to $27.98 million from estate taxes.
To take advantage of portability, the executor of the deceased spouse’s estate must file a timely estate tax return (Form 706), even if no tax is owed. This step is crucial for preserving the full benefit of both spouses’ exemptions.
Additionally, by electing portability, an asset included in the marital deduction calculation will receive a step-up in cost basis at the first spouse's death as well as with the death of the second spouse. Read Fidelity Viewpoints: What is a step-up in cost basis and how can it affect me?
The unlimited marital deduction allows an individual to transfer an unrestricted amount of assets to their spouse during life or at death, tax-free provided both spouses are US citizens. The unlimited marital deduction has a different structure for married couples where one or both spouses are not US citizens.
But simply leaving all wealth to the surviving spouse may result in a larger-than-necessary taxable estate on the death of the surviving spouse. Coordinating the use of the marital deduction with each spouse's lifetime federal gift and estate tax applicable exemption amount may help reduce taxes.
There may also be state estate and gift tax considerations depending on the state you reside in at the time of death and/or the state that you own real estate in at the time of death. Read Insights from Fidelity Wealth ManagementSM: Don’t take the "state" out of estate planning
How does the estate and gift tax exemption work?
When someone passes away, the IRS requires a valuation of their entire estate—this includes real estate, investments, cash, business interests, and personal property. If the total value of the estate is less than the exemption amount, no federal estate tax is owed.
However, if the estate exceeds the exemption, only the amount above the threshold is taxed. The federal estate tax rate can be as high as 40%, making proper planning essential for high-net-worth individuals.
Importantly, the estate and gift tax exemption is unified with the gift tax exemption. This means that any taxable gifts made during your lifetime reduce the amount you can pass on tax-free at death. A taxable gift is an amount gifted over the annual exclusion amount which for 2025 is $19,000. For example, if you gift $3 million during your life, your remaining estate and gift tax exemption would be $10.99 million in 2025.
There are some caveats, including when the gift was made and when gift tax was paid compared to the date of death.
How do I use the estate and gift tax exemption?
There are 2 primary ways to use the estate and gift tax exemption.
- Lifetime gifting strategies can help reduce the taxable estate while you’re alive. An individual can give away assets during their lifetime tax-free using the lifetime gift tax exemption. By reducing the size of the taxable estate during life, estate taxes could be reduced later.
Plus, there’s an annual gift tax exemption that won’t eat into the lifetime exemption. You can give up to $19,000 per beneficiary in 2025, without using any of your lifetime exemption. Married couples can combine their gifts to give $38,000 per beneficiary this year. The annual gift tax exclusion is adjusted for inflation each year.
Gifts can be accelerated for contributions to 529 plans.1 An individual, or a couple, could contribute up to 5 years of annual gift exclusion amounts to a 529. For example, in 2025 two parents or two grandparents could gift their annual exclusion in December, contributing $38,000 to the 529 account, then, when they're free to give again in January, make 5 years' worth of accelerated gifts—an additional combined $190,000, using the 2025 numbers.
Gifts to trusts and charitable donations can also be a way of reducing the taxable estate. Read Insights from Fidelity Wealth ManagementSM: Lifetime gifting
- At death any unused part of your exemption is applied to your estate when you pass away. Your estate’s executor must file IRS Form 706 to claim the exemption and calculate any estate tax due.
For spouses planning jointly, if portability is elected, any unused part of the exemption could be added to the surviving spouse’s exemption.
Thoughtful planning can pay off
The estate and gift tax exemption offers a powerful tool for preserving wealth and passing it on to future generations. Whether you’re planning your estate or helping a loved one navigate theirs, understanding how the exemption works—and how to use it strategically—can make a significant financial difference for yourself and your beneficiaries.