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Simply stated, the estate tax is a tax on your right to transfer property at your death. Gift tax, on the other hand, exists to limit avoidance of the estate tax through the use of lifetime gifts that effectively remove the transferred property from estate tax exposure on the donor’s death. Estate tax is imposed on the “taxable estate.” The taxable estate is the gross estate less any allowable deductions. Conversely, gift tax is assessed on gratuitous dispositions made during your lifetime.
By its nature the federal estate tax is assessed on the value of the property transferred, not on the property itself. Since the privilege of transferring property by devise, bequest, or inheritance is the subject of tax it is characterized as an excise or privilege tax. Computation is fairly straightforward, a single set of deductions, exemptions, and graduated rates are applied to the decedent’s estate. It does not matter how many heirs or beneficiaries share in the estate. Likewise, the federal gift tax has also been interpreted to be a type of excise tax—a tax on the privilege to transfer property.
Generally, the estate and gift taxes are construed together but differences do exist. The estate and gift tax tend to be mutually inclusive, that is, a transfer not taxed under one regime is taxed in the other. But neither are the two mutually exclusive, some transfers may be taxed under both schemes although adjustments such as credits serve to eliminate double taxation. Under the 1976 Tax Reform Act, computational aspects of the two taxes were unified. Thus, a single set of graduated rates is applied to both lifetime and death time transfers. Moreover, a single unified credit was enacted which operates cumulatively to both transfers.