Tax treatment
Tables summarize federal rules from acquired IRS sources; state taxes (e.g. Illinois) are separate.
Transfer taxes (federal)
| Tax | Unit | Annual / lifetime | Return | Notes |
|---|---|---|---|---|
| Gift tax | Donor | Annual exclusion per donee (indexed; $19,000 for 2026 gifts per IR-2025-103) | Form 709 | Taxable gifts consume unified credit |
| Estate tax | Estate | Basic exclusion per decedent ($13.99M in 2025; $15M in 2026) | Form 706 | Portability election on timely 706 |
| GST tax | Transferor / estate | GST exemption (unified with estate exclusion era) | 706 / 709 Sch. D | Direct skips and trust allocations |
Unified credit: gift and estate share one lifetime applicable exclusion amount (see Form 706 and 709 instructions).
Marital deduction and QTIP (estate tax)
| Transfer | Marital deduction? | Second death |
|---|---|---|
| Outright to U.S. citizen spouse | Generally yes | In spouse's estate at FMV |
| QTIP trust (2056(b)(7) election) | Yes if qualified | QTIP assets in spouse's estate |
| Terminable interest (no QTIP) | No | N/A |
| Non-citizen spouse | Limited; QDOT may qualify | Complex |
Bypass trust: uses first decedent's exclusion; not marital deduction property (passes to non-spouse beneficiaries).
Trust and estate income tax (Form 1041)
| Concept | Rule |
|---|---|
| Entity | Estate or non-grantor trust is separate taxpayer |
| DNI | Distributable net income — ceiling for income distribution deduction |
| Distribution deduction | Trust deducts distributions to beneficiaries up to DNI (Schedule B) |
| Beneficiary tax | K-1 reports character of DNI received; beneficiary pays tax |
| Retained income | Taxed to trust at compressed trust rates |
| Grantor trust | Income taxed to grantor, not trust (special reporting) |
| Simple trust | Must distribute accounting income currently |
| Complex trust | Discretionary distributions; tier rules for character |
Trust income tax rates reach the top bracket at relatively low taxable income compared to married individuals (see i1041 instructions rate schedule).
NIIT and other surcharges
Estates and trusts may owe Net Investment Income Tax (Form 8960). Threshold for estates/trusts is much lower than for individuals (see notebook i8960-instructions-net-investment-income-tax-summary if present).
Grantor trust income tax (selected)
| Situation | Income tax owner |
|---|---|
| Revocable living trust | Grantor |
| Grantor retained annuity trust (GRAT) | Grantor during term |
| Intentionally defective grantor trust (IDGT) | Grantor (by design) |
| ILIT (if grantor trust powers) | Grantor for income; insurance proceeds may be estate-tax free if no incidents of ownership |
QSST: S corporation stock held in QSST; S income flows to beneficiary per QSST rules (Form 1041 instructions).
ESBT: Electing small business trust — S portion taxed separately; complex return.
Character preserved through DNI
DNI carries out character of income (capital gain, dividend, etc.) to beneficiaries per tier rules in regulations and instructions.
Publication 950 status
IRS Publication 950 (Introduction to Estate and Gift Taxes) is retired (last prior editions in IRS archive). Current path: Pub. 559 plus Forms 706/709 instructions (irs-estate-gift-tax-forms-hub-summary).
Sources
- i1041-estates-trusts-instructions-summary
- i706-estate-tax-instructions-summary
- i709-gift-tax-instructions-summary