Estate and Gift Tax Basics

• The gift and estate taxes are very similar in that both levy gratuitous transfers, have similar tax rates and use similar credits. Both tax the donor, whether that is the person or the estate, as opposed to the recipient of the property. Both taxes also interact significantly, as many people in preparing for their death provide tax-exempt gifts during their lives to ensure that their property goes to whom they want, while decreasing their estates and thus lowering their estate tax. In recognition of this, the tax code includes all gifts made the three years prior to a decedent's death in his estate and has created one unified tax credit to be used against all gifts and transfers after death.
  
  

Gift Tax Exclusions

• As of 2011, you can give up to $13,000 of tax-free gifts per beneficiary per year. This amount can be doubled if you are married, as you and your spouse can combine your annual exclusion and give $26,000 in tax-free gifts per beneficiary. Any gifts to your spouse, to charities, or payments made to a hospital or school on someone else's behalf are not considered taxable gifts.
  
  

Estate Tax Exclusions

• In 2011, the Estate Exclusion is $5 million, meaning that any estate under that amount does not even need to file an estate tax return. In addition, anything that you leave to your spouse or to a charity is subtracted from your estate and is not a taxable transfer.
  
  

Unified Tax Credit

• The Unified Tax Credit is $345,800. This credit is used throughout your life to offset both the gifts you give while alive and any transfers your estate makes after your death. For example, say that you, a single person, give your niece a $20,000 gift. Your annual gift tax exclusion lowers the taxable amount to $7,000. You then use some of your Unified Tax Credit to make the entirety of the gift tax-free. However, for the rest of your life, you and your estate only have $338,800 left in credit to offset against future gifts.
  
  

Tax Tips and Disclaimer

• For complex estate and gift tax returns, consult with a tax professional, such as a certified public accountant or licensed attorney, as he can best address your individual needs. Keep your tax records for at least seven years to protect against the possibility of future audits. Every effort has been made to ensure this article's accuracy, but it is not intended to be legal advice.