Gift tax and life insurance
Gift tax
Gift taxes are imposed by the Internal Revenue Service (IRS) on individual taxpayers who transfer property to someone else without receiving anything of substantial value and applies to all gifts made during a person’s lifetime. Gifts of money and other property that exceed the annual gift tax exclusion - $19,000 per recipient for 2025 - must be reported to the IRS on Form 709, but gift tax is owed only after the donor’s lifetime exclusion ($13,990,000 for 2025) is used up.
There are some transfers of money or property that are exempt from gift tax:
- Transfers to a spouse who is a U.S. citizen.
- Charitable donations.
- Tuition paid directly to an educational institution on behalf of someone else
- Payments made directly to a qualified medical care provider on behalf of the donee.
- Gifts and transfers made to political organizations.
A loan can also be a gift. When someone makes an interest-free or below-market loan as a gift, the interest not charged, figured at the applicable federal rate, is a gift from the lender to the borrower: each year’s forgone interest on a demand loan, or the whole discount on the day it is made for a loan with a fixed term. Gift loans between two individuals that total $10,000 or less are generally exempt.
Gifts of present interest and future interest
Present interest refers to the immediate and unrestricted ownership of property by the donee, allowing them to possess and use the property at any time. Future interest refers to the ownership of property that will occur at a later date, often contingent upon certain conditions being met; a gift of a future interest does not qualify for the annual exclusion and must be reported on Form 709 whatever its amount.
No income is recognized by the recipient of a gift. The same is true of property received as a bequest or inheritance, though income the property later produces is taxable. However, gain or loss is recognized pending on the sale amount, donor’s basis, and fair market value of the gift on the date of the gift.
Gain on sale of gift property
If the sale of the gift exceeds both the fair market value (FMV) of the gift and the donor’s basis, then the donee retains the donor’s basis for computing a gain.
| Donor’s basis $5,000 | FMV on date of gift $7,000 | Sale of gift $9,000 ($4,000 gain) |
Loss on sale of gift property
If the FMV of the gift is less than the donor’s basis, then the donee uses the FMV at the date of the gift for the purpose of computing a loss.
| Donor’s basis $7,000 | FMV on date of gift $5,000 | Sale of gift $3,000 ($2,000 loss) |
No gain or loss on sale of gift property
No gain or loss is recognized if the gift is sold for more than its FMV at the date of the gift, but less than the donor’s basis.
| Donor’s basis $1,800 | FMV on date of gift $1,000 | Sale of gift $1,500: no gain (below the $1,800 donor’s basis); no loss (above the $1,000 FMV) |
The generation-skipping transfer (GST) tax is a federal tax imposed on transfers to skip persons, individuals two or more generations younger than the transferor, generally grandchildren or great-grandchildren. It applies in addition to any gift or estate tax, and each person has a GST exemption equal to the basic exclusion amount ($13,990,000 for 2025).
Gift-splitting
Gift splitting allows married couples to double their allowed annual gift tax exclusion amount - for 2025, from $19,000 to $38,000 per recipient. The gift tax exclusion is the amount that someone can transfer to another person as a gift without having to pay the gift tax levied by the Internal Revenue Service. Married couples who want to take advantage of gift splitting elect it on Form 709 with both spouses’ consent; they do not have to file a joint income tax return. To qualify, both spouses must be U.S. citizens or residents, and the consenting spouse signs a notice of consent on the donor’s Form 709; the election then applies to all gifts either spouse made to third parties during the calendar year.
Unlimited marital deduction
The unlimited marital deduction allows a donor to transfer an unlimited amount of money or property to their spouse, including after death, without gift or estate tax - but only when the recipient spouse is a U.S. citizen (at death, property left to a non-citizen spouse can qualify only through a qualified domestic trust, or QDOT). Gifts to a spouse who is not a U.S. citizen don’t qualify for the unlimited marital deduction; instead, they qualify for a larger annual exclusion of $190,000 for 2025. The annual exclusion threshold described above is applied separately to each recipient of a gift.
Unified credit
The unified credit (now called the applicable credit amount: $5,541,800 for 2025, the tax on the $13,990,000 applicable exclusion amount, also called the lifetime gift and estate tax exemption) is the combination of the gift tax exemption and the estate tax exemption and is the amount that an individual taxpayer may give either during their lifetime or at death before any gift or estate tax can be assessed against the individual (or their estate). It is the amount that an individual can transfer tax-free during their lifetime through gifts, or at death. Each spouse has a separate exclusion, so a married couple can transfer up to $27,980,000 between them without incurring a gift or estate tax. A surviving spouse can use the deceased spouse’s unused exclusion (DSUE) only if the executor elects portability on a timely filed Form 706. If the estate exceeds the exemption amount (after deductions), the unified credit will offset a portion of the estate tax owed. Property given away outright during life is generally no longer in the donor’s gross estate at death. Instead, taxable gifts made after 1976 are added back as adjusted taxable gifts when the estate tax is figured, and gift tax paid on gifts made within 3 years of death is included in the gross estate.
Life insurance
Under IRC §101(a), most life insurance proceeds are not counted as taxable income. The IRS excludes life insurance death benefits from a beneficiary’s gross income in most cases. However, if a beneficiary elects to receive the proceeds in installments instead of a lump sum, part of each installment is interest the insurer pays on the unpaid balance, and that interest portion is taxable. For example, Teresa dies and leaves William a $30,000 life insurance policy. William elects to take the proceeds over his 15-year life expectancy instead of a lump sum, receiving $2,500 per year. Of that $2,500, $2,000 ($30,000 ÷ 15) is a tax-free return of principal, and the remaining $500 is taxable interest.
International information reporting
Foreign accounts and assets can bring separate reporting obligations, such as the FBAR and Form 8938; International information reporting covers them.