Federal gift and estate tax law permits each tax payer to transfer a certain amount of assets free from tax. These assets may be transferred during his or her lifetime or at death. In addition, certain gifts valued at $12,000 or less can be made that are not counted against this amount (see "Minimizing Estate Taxes").
The amount of money that can be shielded from federal estate or gift taxes is determined by the unified credit. A credit is an amount that eliminates or reduces tax. The unified credit applies to both the gift tax and the estate tax. You subtract the unified credit from any gift tax that you owe.
Any unified credit you use against your gift tax in one year reduces the amount of credit you can use against your gift tax in a later year. The total amount used against your gift tax reduces the credit available to use against your estate tax.*
*www.irs.gov, Estate and Gift Taxes, Unified Credit.
The chart following shows, by year, the dollar amount of your estate excluded from federal taxes and the tax rate on the taxable portion of an estate. Note that rates are as high as 46 percent for the taxable portion of the estate.
Keep in mind that while you can plan to minimize taxes, your estate may still pay some federal estate taxes. Also, your estate may be subject to state estate or inheritance taxes, which are beyond the scope of this pamphlet. Consult an estate planning professional or attorney for more specific information about federal estate taxes and state taxes.
(SOURCE: Federal Citizens Information Center)