Federal Estate Tax, Federal Gift Tax, and
Generation-Skipping Transfer Tax
SUMMARY OF CHAPTER
Chapter 22 is a survey of the unified tax system of wealth transfers by individuals. The basic legal
terminology covered first is followed by a discussion of the gift tax, generation-skipping tax, valuation
concepts, and some family tax planning.
Computation and Payment of Estate Tax
¶22,001 Estate Tax Computation—Summary
The 10 steps in the estate tax formula summarize the scheme of computation of the estate tax. Of
special importance are the add-back of adjusted taxable gifts in Step 5 and the subtraction of gift taxes
paid and the application of the applicable credit amount in Steps 8 and 9.
¶22,009 Applicable Credit Amount
The Taxpayer Relief Act of 1997 renamed the ‘‘unified credit'' to the ‘‘applicable credit amount.''
The applicable credit amount is a flat $780,800 in 2007. This equates to an ‘‘applicable exclusion
amount'' of $2,000,000 in 2007. The applicable credit amount is never ‘‘used up'' during life, other than
to see if any gift tax is currently payable. Since adjusted taxable gifts are added to the estate tax base, the
applicable credit amount is still available to the estate.
¶22,015 Unified Rate Schedule
Due to the applicable credit amount, the first dollar actually subject to estate tax is taxed at 41
percent. The maximum marginal tax bracket is 45 percent in 2007.
¶22,025 Payment of Tax and Returns
Estate tax returns are due nine months after death, so there is no tax season. Filing is required once
the gross estate exceeds $2,000,000 in 2007, even if no tax is due. Extensions of payment may be granted
in hardship cases. There are special tax benefits for farms and closely held businesses.
¶22,035 Credits Against Tax
First, the applicable credit amount and the gift tax credit are subtracted from the tentative estate tax.
Only if there is still a tax payable is there a need to look for other credits. The most important one is the
state death tax credit (for 2004 but a deduction after 2004 and before 2010), then the credit for the death
taxes on prior transfers, and finally the foreign tax credit. Most states levy a ‘‘pick up'' tax, i.e., they
2007 CCH. All Rights Reserved.