A unified credit is allowed against the federal gift and/or estate tax liability. The amount exempted from tax by the unified credit (the 'applicable exclusion amount' of the credit) is $2 million in 2008 and $3.5 million in 2009. In 2008, when the first $2 million of your taxable estate is exempt from federal estate tax, you are actually receiving a credit of $780,800 which effectively exempts a total of $2 million in cumulative taxable transfers (by gift and at death). Simply put, if you die in 2008, the first $2 million in assets you own will not be subject to estate tax. Any amount you own above $2 million subject to federal taxation (see Gift Tax and Generation Skipping Tax).

While the estate and generation skipping tax exemption equivalent of the unified credit increases over the next few years, the gift tax exemption equivalent of the unified credit remains at $1 million. The estate, gift and generation skipping tax for 2008 and 2009 is 45 percent. The estate and generation skipping tax is scheduled to expire on January 1, 2010 but it is scheduled to be restored (with only a $1 million exemption) on January 1, 2011 with a rate of 55 percent. The gift tax is not scheduled to expire with the estate and generation skipping tax. In 2010, the top gift tax rate will be 35 percent. In 2011, the top gift rate will be 55 percent.