The assets of an estate can be depleted through administrative expenses and taxation. Good estate planning looks for ways to preserve your assets and plan constructively how to pass on as much of your estate as possible to your heirs.

Gift Tax—The value of a gift is measured by the fair market value of the property less any amount received on the transfer. The taxable gift is the value of the gift less any annual exclusions and marital and charitable deductions. Your $1 million gift tax exemption is applied to any taxable gifts. If your taxable gifts are more than the $1 million gift tax exemption, gift tax is due.

Estate Tax—The gross estate includes the value of any property that is owned at death. The value is measured by the price a willing buyer would pay for the property. The taxable estate is the gross estate less debts, funeral expenses, administration expenses and any marital and charitable deductions. The estate tax exemption first reduced by the amount of gift tax exemption used during life and is then applied to the taxable estate. If the taxable estate is more than the estate tax exemption, estate tax is due.

Benefits of the Gift Tax—Paying gift tax is better for your estate than paying an estate tax. The gift tax is tax exclusive, meaning that the gift tax is paid from funds that are not subject to the gift tax. On the other hand, the estate tax is tax inclusive, meaning that the estate tax is paid from funds that are subject to the estate tax. In addition, the money used to pay gift taxes is not subject to either a gift tax or an estate tax unless the gift tax is paid within three years of death. In this case, the value of the paid gift tax is included in the gross estate.

Gift Tax Annual Exclusion—The annual exclusion allows an individual to give up to certain amount per year per recipient without paying a gift tax, without using any of the gift tax exemption and without filing a gift tax return. For 2007, the amount is $12,000. The amount of the exclusion is indexed annually for inflation. Any amount not used cannot be carried over to following years.

Gift Tax Exemption—Each individual has a $1 million gift tax exemption to cover lifetime taxable gifts before any gift tax is paid.

Estate Tax Exemption—Each individual has an estate tax exemption to cover transfers at death. In 2007 and 2008, the exemption is $2 million and rises to $3.5 million in 2009, reverting to $1 million in 2011. (In 2010, there is no estate tax.) The estate tax exemption will be reduced for any amount of the $1 million gift tax exemption used during life.

Gift and Estate Tax Deductions—Any assets given to a U.S. citizen spouse during life or at death qualify for the marital deduction from the gift and estate taxes. Any assets given to a qualified charity during life or at death qualify for the charitable deduction from the gift and estate taxes.

State Death Taxes—Two types of state death taxes exists: An estate tax on the right to transfer property and an inheritance tax on the right to receive property. The inheritance tax is typically a graduated tax adjusted according to the proximity of the recipient's relationship to the decedent. These taxes vary by state and it is best to research them carefully when constructing your estate plan.