Because the estate-tax rate is so high, someone near the end of their life has a strong incentive to give their assets away so their heirs can claim the assets were not part of the estate and avoid the tax. By imposing a tax on gifts, the ability to make "deathbed" transfers to avoid the estate tax is reduced.
What is and isn't a gift seems like a straightforward issue, but from a tax code perspective, there are some nuances worth noting.
First, the transfer of an asset to another generally must be a full and actual transfer of ownership. The term in the tax code is a "completed gift." The transfer cannot be contingent upon an event or action, and the donor cannot have the ability to get the asset back.
There are gifting techniques that allow funds to be used for the donor's benefit. For instance, a gift can be made to a trust that pays the donor income for a specified time period, after which the assets shift to a beneficiary. (This technique can be complex and is beyond the scope of this primer, but we wanted to acknowledge that not all gifting involves the immediate and full surrender of an asset.)
More from Investor Toolkit:
Are you prepared for a sudden windfall?
A 'back door' Roth IRA strategy that benefits high earners
Psychology of investing: Don't let emotions influence your decisions
Second, the value of the gift is typically the fair market value of the asset when the gift is completed, not what the donor wants to claim the asset is worth.
Since the taxes are based on the value, donors have an incentive to claim assets are worth less than they really are. For gifts of cash or assets, such as publicly traded securities, valuing the gift is straightforward, while other assets — such as real estate, art and jewelry — can be more challenging.
Many lifetime transfers are exempt from gift taxes. Just as you can leave an unlimited amount to your spouse or qualified charities upon your death without estate taxes, you may give unlimited amounts to your spouse or to a qualified charity anytime during your life without gift taxes.
For gifts to other recipients, there is an "annual gift-tax exclusion." It was $10,000 for many years but in 2017 became $14,000. (This limit is indexed to inflation and should be modestly higher at some point in the future.) The exclusion permits you to gift up to $14,000 of assets each to as many people as you like during 2017.