Decedent, gift, estate, and trust taxation

Taxation of decedents, gifts, estates, and trusts can be a complex and intricate area of a tax practice. This overview provides a summary of what you need to know to help your clients understand their tax obligations and advise them in these areas.

The final income tax return of a decedent

When a taxpayer dies, a final Form 1040 must be filed if their income meets the minimum filing requirements. Even if a return is not required, a return could be filed if it results in a refund. The due date for the return is the typical tax deadline for the tax year in which the taxpayer died, usually April 15.

The decedent’s return should be marked as “deceased” and include the date of death. All income received up to the date of death, along with any eligible credits and deductions, should be reported. The person responsible for the estate, such as an executor or surviving spouse, is in charge of filing the return and ensuring taxes are paid.

A surviving spouse may file a joint return with the decedent. If a refund is due and someone other than a surviving spouse or court-appointed personal representative is filing, Form 1310, Statement of a Person Claiming a Refund Due a Deceased Taxpayer, is required to claim the refund. However, this form is not required if the surviving spouse files a joint return. A paper-filed Form 1040 for a deceased taxpayer should have the word “deceased,” the decedent’s name, and the date of death printed at the top of the form.

Gift tax and generation-skipping transfer tax

Gift tax is reported on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This return is necessary if a taxpayer makes taxable gifts exceeding the annual exclusion amount or if a gift is split between spouses. A donor can give up to the annual exclusion amount to as many people or donees as they want each year without incurring gift or estate tax.

For 2025, the annual gift exclusion amount is $19,000 per donee. Married couples can use gift splitting, which allows them to give twice the individual amount ($38,000 in 2025) without being subject to gift tax. Both spouses must be US citizens or residents, and must consent to the gift splitting by each filing and signing a gift tax return. Gift tax returns are always individual, not joint, and gift splitting requires both spouses to file Form 709 regardless of the gift amount. Form 709 must be paper filed because there is no option for e-filing.

The generation-skipping transfer tax (GSTT) is a federal tax on transfers of wealth that skip a generation of heirs. The purpose is to prevent the use of estate planning to avoid estate tax as assets pass through generations. This tax is applied at a flat rate equal to the highest estate and gift tax rate, which is currently 40%. The GSTT is reported on Form 709 and calculated on Schedule D.

Estate tax

Estate tax is a tax on the transfer of a person’s wealth after their death. The federal estate tax is levied on the gross estate, which includes all property in which the decedent had an interest, regardless of its location. Estate tax is paid by the estate before assets are distributed to beneficiaries who do not pay income tax on their inheritance.

For 2025, the basic exclusion amount is $13.99 million per individual. The One Big Beautiful Bill permanently increases the federal estate and gift exemption to $15 million per individual, effective January 1, 2026. This exemption will be indexed for inflation starting in 2027.

The value of an estate’s property is generally based on its fair market value on the date of death. An alternative valuation date may be elected, valuing assets six months after the date of death if their value has decreased. A special use valuation may allow real property to be valued based on its current use rather than its highest and best use.

Allowable deductions can reduce the gross estate’s taxable value. These include the following:

• An unlimited marital deduction for transfers to a surviving spouse.
• A charitable deduction for gifts to a qualified 501(c)(3) organization, with no limitation on the amount.
• Debts, funeral expenses, and estate administration expenses.
• Property losses due to casualty or theft that are not compensated by insurance.

Fiduciary income tax

Fiduciary tax is the income tax on the income of estates and trusts. An estate must file Form 1041, U.S. Tax Return for Estates and Trusts, if it has gross income of $600 or more. A trust must file if it has any taxable income or gross income of over $600.

Income from an estate or trust that is distributed to beneficiaries is taxed to the beneficiaries, not the estate or trust. This is reported on a Schedule K-1 from Form 1041. It is a best practice to review the will or trust documents before preparing a return, because different types of trusts are treated differently for tax purposes. For example, income from a grantor trust is generally reported on the taxpayer’s individual Form 1040.

State tax considerations

State filing requirements for estate and fiduciary taxes can differ significantly from federal thresholds. An estate may be exempt from federal tax due to the high exemption amount, but still be subject to state tax if the state’s exemption is lower. The majority of states with estate tax use a progressive rate structure. In total, 12 states and the District of Columbia impose estate tax, while six states impose an inheritance tax. Maryland is the only state that imposes both. It is crucial to consider both federal and state-level laws when planning.

Editor’s note: An expanded version of this article is available in an on-demand webinar.