Estate and gift taxes are imposed by the federal government on the transfer of property from person to another, either at death (estate tax) or while the giver of the property is still alive (gift tax).

Estate Tax

Estates are required to file a federal estate tax return if the value of the "gross" estate is above a certain dollar amount (for 2007, the amount is $2 million). The gross estate includes the value of all property in which the decedent had an interest at the time of his or her death -- including such items as real estate, stocks and bonds, mortgages, notes and cash, insurance on the decedent's life, and jointly owned property. If spouses own property in joint tenancy, and one dies, one half of the value of the jointly held property is included in the gross estate of the deceased spouse.

Estate Tax Exemptions

Personal Exemption. The "personal estate tax exemption" allows a certain amount (or all) of a deceased person's estate to transfer free of the estate tax. The personal exemption is currently $1.5 million, but this amount is scheduled to increase over the coming years until 2010, when the estate tax is set to be repealed. In 2011, the exemption will revert to $1 million unless Congress extends the repeal. Keep in mind that Congress may take further steps to change the personal estate tax exemption at any time, or even repeal the estate tax altogether prior to 2010.

Marital Deduction. A deceased person's estate can pass tax free to a surviving spouse, as long as the surviving spouse is a U.S. citizen and his or her interest in the estate is not a nondeductible terminable interest. A nondeductible terminable interest is an interest in the property that is held by someone other than the surviving spouse. This third party has some right or interest in the property once the surviving spouse's interest in the property ends (i.e. upon the death of the surviving spouse). The marital deduction cannot be applied to such property.