In addition to the $1 million credit equivalent for 2003 ($1.5 million in 2004), there are other exclusions and deductions from federal gift and estate tax. These include:

• Funeral and administrative costs of your estate , (attorney and executor fees, etc.).
• Any debts, or unpaid bills.
• An $11,000 Annual Exclusion. Essentially, anyone can give $11,000 tax-free to an unlimited number of recipients every year. A couple can give $22,000 to each child, if they want, without paying taxes on the transfer. The gifts are income tax-free to the recipient. But to qualify, the gift to each recipient must be outright, not a promise of a future benefit. The 1997 Tax Law introduced an inflation adjustment that will increase the exclusion amount by $1,000 each time the annual adjustments add up to $1,000 or more.
• An Unlimited Marital Deduction (UMD). In the Economic Recovery Tax Act of 1981, Congress voted to let a married couple not be taxed on shared assets until the death of the survivor. Now, gifts of any size to your (U.S. citizen) spouse — lifetime or at death — do not "use up" any of the estate tax credit equivalent and are not included in the tax calculation.

  However, only certain kinds of property, or assets, qualify for the UMD. Insurance proceeds payable to your spouse qualify, as well as your half of any jointly-owned property with your spouse. Any gift passed to your spouse via a trust only qualifies if it is included in your spouse's taxable estate at death. Check with your lawyer for more details on what qualifies.

  Although the UMD sounds great, be careful. Most couples use the unlimited marital deduction to avoid estate tax on the first death. This leaves the whole estate to the survivor, and the estate often exceeds the unified credit equivalent amount. Also, with time, the estate continues to grow. This also wastes the $1,000,000 credit equivalent exclusion.

  With a little planning they could avoid unnecessary estate taxes by dividing their joint estate so each spouse takes advantage of their credits and using the marital deduction for amounts that exceed the unified credit equivalent.

• An Unlimited Exclusion for Direct Medical or Tuition Gifts. Payments must be made directly to the institution not just earmarked for this use and given to the beneficiary.
• Charitable Donations. Not all non-profits are tax deductible, so make sure your charity qualifies before you make the gifts. The Internal Revenue Service publishes a book, Publication 78 (the Cumulative List of Organizations), which lists all organizations qualified to receive gifts. You can search exempt organizations at (http://www.irs.gov/charities/article/0,,id=96136,00.html). Whether you give gifts while you are alive, or by will, depends on whether you want to save on income or estate taxes. Typically you will get an income tax deduction equal to the market price of the gift at the time the gift was made. You can also create charitable remainder trusts.

• Did You Know...?
  1. Give away an insurance policy and get an income tax deduction for its value.
  2. Name a charity as an irrevocable beneficiary (you receive a tax deduction for premium payments)

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