There are four key taxes on estates: estate taxes, gift taxes, unlimited marital deductions, and generation-skipping taxes.

1. Estate taxes:

Estate taxes, or inheritance taxes, are taxes that must be paid on an estate that has a value greater than a government-determined exclusion amount. An estate tax return for a U.S. citizen or resident needs to be filed only if the gross estate value exceeds the exclusion amount that has been determined by the government in the year of the citizen or resident’s death (see Table 1). For example, if John Smith died in 2007 and his estate was valued at less than $2 million, John’s estate would not be required to pay estate taxes because the value of John’s estate would be less than the estate tax exclusion amount for 2007. In other words, this $2 million amount would be exempt from estate taxes.

Table 1: Estate Tax Limits

Exclusion Amounts

Year	Amount	Top Tax Rate
2002–3	$1,000,000	49%
2004–5	$1,500,000	48%
2006–8	$2,000,000	46%
2009	$3,500,000	45%
2010	Eliminated
2011	$1,000,000	49%
2012	$1,000,000	49%

The $2 million tax-free transfer threshold for 2007 will be increased to $3.5 million by 2009, and the threshold will then be eliminated in 2010. However, if laws are not enacted to make the elimination of the thresholds permanent, threshold levels in 2011 will be the same as levels in the year 2000.
An estate tax rate of 41 percent to 50 percent (based on the exact value of the estate) will be assessed on estates valued in excess of the tax-free transfer threshold. The top rate will decline from 50 percent in 2003 to 45 percent in 2007. Small-business and family-farm owners receive special treatment regarding estate tax rates.

Table 2 Unified Estate Tax and Gift Tax Rates

If Amount is Over	But not Over	Tax on Column A	Rate on Excess over A
$0	$10,000	$0	18%
$10,000	$20,000	$1,800	20%
$20,000	$40,000	$3,800	22%
$40,000	$60,000	$8,200	24%
$60,000	$80,000	$13,000	26%
$80,000	$100,000	$18,200	28%
$100,000	$150,000	$23,800	30%
$150,000	$250,000	$38,800	32%
$250,000	$500,000	$70,800	34%
$500,000	$750,000	$155,800	37%
$750,000	$1,000,000	$248,300	39%
$1,000,000	$1,250,000	$345,800	41%
$1,250,000	$1,500,000	$448,300	43%
$1,500,000	$2,000,000	$555,800	45%

 Table 3 Unified Estate Tax Exclusion Amounts  

Amounts Above	Year	Tax on Column A	Rate on Excess
$1,000,000	2002-03	$345,800	49%
$1,500,000	2004-05	$555,800	48%
$2,000,000	2006-08	$780,800	46%
$3,500,000	2009	$780,800	45%
$0	2010	$0
$1,000,000	2011+	$345,800	45%

  

2. Gift taxes:

Gift taxes apply to the transfer of any property, including money, in the form of a gift. If you sell something at less than its full value, if you make an interest-free or reduced interest loan, or if you allow the free use of your property or income from your property, you may be making a gift. Gift taxes are taxes paid on gifts of property or money that exceed the annual exclusion, which was $12,000 per individual (or $24,000 per couple) in 2007. This amount can be divided and given to an unlimited number of people without incurring federal gift taxes. In the future, the $12,000 exclusion amount will be indexed to account for inflation; the exclusion amount will increase in $1,000 increments. A gift tax must be paid on all transfers to others (other than a spouse) that are in excess of the maximums listed below.

Table 4 Gift Tax Rates

Year	Maximum Amount
1982-2002	$10,000
2003-2005	$11,000
2006-2007	$12,000
2008	Indexed to Inflation in $1,000 increments

Gifts in excess of the annual exclusion limit are subject to taxes and are subtracted from your lifetime gift limit of $2 million in 2007. The following are exempt from this limit: gifts less than the exclusion amount in any of the previous years; tuition payments made directly to the school or medical expenses paid directly to the hospital for others; and gifts to spouses, political organizations, or charities. While a gift for one year may be greater than the annual exclusion and you must file a gift tax return (form 409), you may not have to pay a gift tax by applying the unified credit to your gift tax.

Table 5

Year	Gift Tax Exemption Equivalent	Gift Tax Unified Credit
2002–3	$1,000,000	$345,800
2004–5	$1,000,000	$345,800
2006–8	$1,000,000	$345,800
2009	$1,000,000	$345,800
2010	$1,000,000	$330,800
2011	$1,000,000	$345,800

3. Unlimited marital deductions:

There is no limit on the value of an estate that can be passed tax-free to a spouse who is a U.S. citizen. However, the unlimited marital deduction does not apply to spouses who are not U.S. citizens; the limit on tax-free gifts that can be made beyond the tax-free transfer threshold per year to noncitizen spouses is $117,000 in 2006.

4. Generation-skipping taxes (GSTT):

In addition to the regular estate tax, a flat 46 percent tax is imposed on any wealth or property transfers made to a person two or more generations younger than the donor in 2006; this rate will drop to 45 percent in 2009 (see Table 31.6). The GSTT is designed to allow tax-free transfers to spouses and children, but to tax transfers going to grandchildren and those who are two or more generations away from the person making the transfer. The tax is 46 percent of the value of the property transferred in 2006, while the rate drops to 45 percent in 2009; the tax is repealed in 2010 and reinstated at 55 percent in 2011 and beyond. There are exceptions to this tax. The $11,000 gift-tax exclusion applies, as do the education-tax exclusion and medical-expense gift-tax exclusion. In addition, up to $2 million per individual ($4 million per couple) may be passed on to grandchildren in 2006 without incurring taxes.

Table 6  

Year	Generation-Skipping Transfer Tax Exemption	Tax Rate of Amount over Exemption
2005	$1,500,000	47%
2006	$2,000,000	46%
2007	$2,000,000	45%
2008	$2,000,000	45%
2009	$3,500,000	45%
2010	$0	Repealed
2011	$1,120,000	55%