When developing an estate plan, it is crucial to consider the impact of federal gift and estate taxes on the wealth you intend to pass to your heirs. Understanding how these taxes are calculated can help you make informed decisions and minimize the impact taxes will have on the inheritance you pass down to loved ones. Toward that end, the Los Angeles attorneys at Schomer Estate & Wealth Advisors explain how federal gift and estate taxes are calculated.
What Is the Federal Gift and Estate Tax?
The federal government imposes a tax on the transfer of assets upon the death of a taxpayer. This tax, known as the federal gift and estate tax, applies to all taxpayers and applies to the value of assets that exceed the current lifetime exemption amount. Currently, the tax rate stands at 40 percent; however, each individual is entitled to make use of the lifetime exemption which reduces the taxable portion of the estate. Initially set at $5 million, the exemption has been significantly (and temporarily) increased in recent years to $13.99 million per person (as pf 2025). If legislative changes are not made, this amount will revert to the initial $5 million (with adjustment for inflation) in 2026.
How Is the Federal Gift and Estate Tax Calculated?
To determine whether the estate of a decedent will owe federal taxes, several steps must be followed, including:
- Identify Estate Assets. The first step is to compile a list of assets owned at the time of death, which may include cash, investments, real estate, business interests, and securities, among others. The total value of these assets forms the decedent’s gross estate.
- Account for Lifetime Gifts. In addition to the assets held at death, gifts made during the individual’s lifetime must be factored into the calculation. Many lifetime gifts are subject to taxation and must be added back to the taxable estate.
- Determine Fair Market Value. Each asset and gift must be assigned a fair market value as of the date of death. This value is based on what a willing buyer would pay in an open market, rather than the original purchase price or future potential value.
- Calculate the Taxable Estate. To determine the taxable estate, deductions are applied to the gross estate. Common deductions include outstanding debts, funeral and administrative expenses, donations to charitable organizations, and property transferred to a surviving spouse under the marital deduction. Certain assets related to farming or family-owned businesses may qualify for special reductions.
- Apply the Lifetime Exemption. Once deductions and lifetime gifts have been accounted for, the lifetime exemption is subtracted from the taxable estate. As of 2025, this exemption stands at $13.99 million. If there is a balance left after deducting the current lifetime exemption amount, that balance is subject to the 40 percent federal gift and estate tax rate.
Reducing Federal Gift and Estate Taxes
Because tax laws frequently change and asset values fluctuate over time, it is essential to engage in proactive estate planning to reduce your estate’s exposure to taxes after you are gone. Working with an experienced estate planning attorney can help implement strategies to minimize exposure to federal estate taxes. Common tax avoidance tools and strategies that you might use include lifetime gifting, charitable contributions, and the creation of an irrevocable trust. By working closely with an experienced estate planning attorney, you can implement tax avoidance strategies in your plan that help preserve more of your estate for your beneficiaries while ensuring compliance with federal tax laws.
Do You Have Questions about How Federal Gift and Estate Taxes are Calculated?
For more information, please join us for an upcoming FREE seminar. If you have questions or concerns about federal gift and estate taxes, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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