money and property you own when you die (your estate) may be subject
to federal estate tax. Learning about estate and gift taxes --
and preparing in advance to avoid or reduce them -- can save your
inheritors a bundle. Estate tax may apply to your taxable estate
at your death. Your taxable estate is your gross estate less allowable
gross estate includes the value of all property in which you had
an interest at the time of death. Your gross estate also will
include the following.
insurance proceeds payable to your estate or, if you owned the
policy, to your heirs.
The value of certain annuities payable to your estate or your
The value of certain property you transferred within 3 years before
Trusts or other interests established by you or others in which
you have certain powers.
allowable deductions used in determining your taxable estate include:
Funeral expenses paid out of your estate,
2) Debts you owed at the time of death, and
3) The marital deduction (generally, the value of the property
that passes from your estate to your surviving spouse).
gift tax applies to the transfer by gift of any property. You
make a gift if you give property (including money), or the use
of or income from property, without expecting to receive something
of at least equal value in return. If you sell something at less
than its full value or if you make an interest-free or reduced
interest loan, you may be making a gift. The general rule is that
any gift is a taxable gift. However, there are many exceptions
to this rule. Generally, the following gifts are not taxable gifts.
that are not more than the annual exclusion for the calendar year.
- Tuition or medical expenses you pay for someone (the educational
and medical exclusions).
- Gifts to your spouse.
- Gifts to a political organization for its use.
- Gifts to qualified charities (a deduction is available for these
- Annual Exclusion
separate annual exclusion applies to each person to whom you make
a gift. For 2002, 2003 and 2004, the annual exclusion is $11,000.
Therefore, you generally can give up to $11,000 each to any number
of people in 2002, 2003 and 2004 and none of the gifts will be
taxable. If you are married, both you and your spouse can separately
give up to $11,000 to the same person in 2002, 2003 or 2004 without
making a taxable gift. Gifts to individuals are not deductible
on the donor's income tax returns.