Latest numbers and info from the IRS.
The annual exclusion for gifts is raised to $12,000 beginning in 2006
The applicable exclusion amount is increased to $2,000,000 for estates and remains at $1,000,000 for gifts
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Most gifts are not subject to the gift tax and most estates are not subject to the estate tax. (Only about 2% of all estates are subject to the estate tax). For example, there is usually no tax if you make a gift to your spouse or a qualified charity or if your estate goes to your spouse or qualified charity at your death. If you make a gift to someone else, the gift tax does not apply until the value of the gifts you give that person is more than the annual exclusion for the year.
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The person who receives your gift or your estate generally will not have to pay any gift tax or estate tax because of it. In addition, that person will not have to pay income tax on the value of the gift or inheritance received. NOTE: There are some technical applications for "Income in Respect of Decedent" under \ufffd691 that will have to be considered for income earned but not otherwise taxed prior to the date of death.
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IOW, you can give $12,000 per year to someone without any tax implications. You can, over your lifetime, give away $1M without any tax implications. Estates smaller than $2M at death are not taxed. The recipient is not taxed - the estate is.
It's hard for me to get riled up about 2% of estates being subject to estate taxes. YMMV.
The maximum estate tax rate is 47% [link|http://www.irs.gov/pub/irs-pdf/i706.pdf|Form 706 Instructions]. It's graduated from 18% (for taxable amounts over $10k), to 47% (for taxable amounts over $2M) - Table A.
As Ben has said, we can argue about where the tax should kick in and how high the tax rate should be. But the tax serves a useful purpose and should be retained for large estates.
Cheers,
Scott.