The following provides a general overview of how the federal government calculates an estate’s tax liability and the many options the tax code provides for reducing an estate’s overall tax liability. This information is intended to serve as an introduction to the estate tax and should not be considered as legal or financial advice. The unified transfer tax – which is comprised of the estate tax, gift tax, and generation-skipping transfers – is extremely complex. With careful planning and use of permissible exemptions, deductions, and gifts, the tax upon dying for wealthy families can be greatly reduced. The information below is not intended to provide tax advice or to fully explain how to reduce the impact of the estate tax. Rather it is intended to be illustrative of how factors such as charitable bequests greatly reduce taxation. I. M. Rich dies in 2006, leaving nearly $3 million. His will specifies that $100,000 is to be given to his church and to several charities, and that one-half of his adjusted gross estate be given to his wife. Even without use of a range of credits, his estate tax would only be $145,200 or 4.9% of total assets. Here is how the tax would be calculated: Assets (fair market value) Car $5,000 House 450,000 Stocks 1,500,000 Life Insurance 1,000,000 Bank Accounts 10,000 Total Assets $2,965,000 Deductions Mortgage $50,000 Credit cards 1,000 Funeral expenses 3,000 Life Insurance 5,000 Legal/accounting fees 6,000 Total Deductions $ (65,000)   Adjusted Gross Estate $2,900,000 Marital deduction ($2,900,000 X 50%) 1,450,000 Charitable bequests 100,000   ($1,550,000) Taxable Estate $1,350,000 Tax on 1st $1,250,00 $448,300 Tax on excess (43% of $100,000) $43,000 Total Tax $491,000 LESS: Unified Credit (345,800) Estate Tax Before Other Credits $145,200 Increasing the charitable bequest to $200,000 would have reduced the estate tax by $43,000, showing the advantage of using the charitable deduction. Additionally, as Deloitte and Touche advertises, "You can transfer sizable amounts of wealth tax free if you formulate and implement a gifting program early." Let's assume I.M. Rich and his wife have three children, each of whom is married and has two children. A gift of $20,000 per year ($10,000 from the husband, $10,000 from the wife) in cash or value of property may be given to each child, grandchild, and son- or daughter-in-law. Each year $240,000 (12 x $20,000) could be removed from the Rich's combined estates and would grow by any after-tax earnings or appreciation. Also, the children and grandchildren may have lower income tax rates than the parents.