Estate tax is the levy by the government against the taxable estate of a deceased person. Taxable estate means gross estate reduced by allowable deductions. Gross estate means total estate comprising the value of all assets owned by the deceased at the time of death. IRS determines taxable estate by subtracting from gross estate certain allowable deductions like funeral expenses paid out of the estate, debts outstanding at the time of death, estate administration expenses, charitable, marital, and deductions

The assets are valued at their fair market value, or the price they would fetch if sold in an open market. The personal representative of the benefactor can choose the valuation date for ascertaining the value of the assets. It can be either the date of the death of the benefactor, or six months later. This alternate valuation date is allowed only if it results in lower tax incidence.

The estate becomes liable for tax with the death of the benefactor and is usually paid out of the estate before distributing the property to the beneficiaries. Unless an extension is obtained, the estate tax is payable within nine months from the death of the benefactor. The personal representative of the benefactor should file Form 706 in evidence of the assets comprising the estate, and Form1041 to report the income generated by the estate.

For the year 2005, theres no estate tax on the first $1.5m of the net estate. This basic exemption limit will be increased to $3.5m in 2009. The estate tax will be totally abolished in 2010 and reinstated to an exemption of $1m in 2011.

Estate tax can be reduced by following certain techniques. One is gifting the assets during ones life time. From 2006, Federal tax law permits each individual to gift $12,000 per year to as many people as one wants without incurring gift tax. Instead of giving a lump sum after death, one can give such annual gifts when alive and reduce the taxable estate. One can also gift stocks, a percentage of ownership in real estate, or business as long as it is below $12,000.

Any transfer of assets to spouse during life time is free from estate and gift tax irrespective of the amount. But the surviving spouse must remarry and transfer the entire estate to the new spouse to enjoy fresh unlimited marital deduction. Also it is customary to create bypass trusts, wherein property is held in trust for children while still providing for the surviving spouse, life insurance trusts, irrevocable trusts handling the property outside the estate, and donations to qualified charities.