Properly advising a client on estate and gift taxes is an extremely important part of estate planning and trust administration.  Similar to the process of using "deductions" and "exemptions" to reduce your taxable income on your income taxes, the key "deductions and exemptions" available under the estate and gift tax laws are the following: 

               Annual gift tax exclusion amount. In 2009, $13,000 per person per recipient may be given away by a donor without having to claim any of the donor's $1 million lifetime gift tax applicable exemption amount.  The exclusion applies to the fair market value of the gift at the time of the gift. This gift does not have to be reported to the IRS; this is called an "exclusion."  A married couple has a combined $26,000 annual exclusion for each person they wish to give to.  Other exclusions, which are not subject to the $13,000 annual limit, can be used for direct payments for medical expenses and college tuition.

              Lifetime gift tax exemption. Each individual has a $1 million lifetime exemption from the gift tax.  All gifts over the annual exclusion will count against this lifetime exemption.  For example, your gift (or gifts) valued at $14,000 in a single year to an individual will fully utilize your $13,000 exclusion amount and will consume $1,000 of your $1 million life time gift tax exemption. All gifts must be analyzed under these two important tax avoidance rules. The lifetime exemption is cumulative, so care should be taken to track its use.   Gift tax returns should be filed for all gifts that "eat" into your lifetime gift tax exemption, even when no gift tax is due, so as to trigger the running of the statute of limitations against an IRS challenge. 

              Estate tax credit (also called the applicable exemption amount).   There is considerable uncertainty right now in the estate tax situation.  Under the current 10-year law enacted in 2001, the estate tax scheme in 2010 is completely different than in prior years. Instead of a liftime exemption credit that sheltered up to a $3.5 million estate, the current estate tax scheme has been replaced by a basis adjustment credit in which an estate may adjust up to $2 million in basis on assets transferred on death.  However, it is highly likely that Congress will go back to the old estate tax regime with lifetime credits and stepped up basis rules.  

                 Marital deduction. Gifts to your spouse -- whether during your lifetime or at your death by will or trust -- are deducted from your gross estate for estate tax purposes.

               Charitable deduction.  Gifts to charities, educational institutions and religious organizations and institutions are deducted from your gross estate for estate tax purposes.  Utilizing these deductions is an excellent way to reduce the value of your estate below the taxable threshold. Individuals and couples facing significant estate taxes, often because of highly appreciated property, sometimes set up charitable remainder trusts to provide income to them during life, while allowing them to deduct the appreciated, fair market value of the "remainder" gift that passes to the charity at their death, thereby minimizing both capital gains and estate taxes.