The federal estate tax is a tax on the transfer of property upon death. For estates of individuals dying in 2002 and 2003, the estate tax applies to taxable estates over $1 million, after taking into account allowable deductions, such as charitable bequests and property passing to a surviving spouse.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the exclusion from federal estate tax will increase and the maximum estate tax will be reduced from 2004 through 2009 prior to the repeal of the estate tax in 2010. A modified carryover basis system will take effect for inherited asset when the estate tax is repealed.

The top gift tax rate will also decline, but the gift tax will not be repealed. A $1 million lifetime exclusion from gift tax is allowed for taxable gifts after 2001. For 2002 and all later years, a $345,800 lifetime credit against gift tax is allowed, providing a lifetime exclusion for $1 million of taxable gifts. If taxable gifts are made, the amount of the credit used to offset the gift tax in one year reduces the amount of credit that can be used against gift tax in a later year. The $1 million gift exclusion will not increase in 2004 when the estate tax exemption increases from $1 million to $1.5 million. The maximum gift tax rate will be reduced along with the maximum estate tax rate from 2003 through 2009. Starting in 2010, the top gift tax rate will be the top prevailing income tax rate.