Hi and welcome to Just Answer!
Please see estate tax form 706 for 2008 - http://www.irs.gov/pub/irs-prior/f706--2008.pdf
Gross estate tax is calculated on the line 8 – after deducting allowable $2,000,000
Allowable unified credit – that is based on the total amount of lifetime taxable gifts - is calculated on the line 11 – thus it is not a deduction, but a credit against estate taxes.
So your assumption is incorrect $2,000,000 eexclusion is used regardless if any taxable gifts were made, but taxable gifts will reduce an additional unified credit.
For your example - the gross estate $6,000,000 in 2008 - the taxable estate will be $4,000,000 (after exclusion) and estate taxes will be calculated based on that amount. There will be unified credit against estate tax - but that credit will be reduced by lifetime taxable gifts and may be zero if fully used over the decedent's lifetime.
assuming 50% estate tax, your heirs would pay 2 million dollars in taxes?
There are other exclusions - for instance Funeral Expenses and Expenses Incurred in Administering Property Subject to Claims - but as a raw estimat eyou are correct.
yes, we're only talking "raw" estimates. so to confirm, you are single and you made a gift of $1,000,000 in year 2004. You die in 2008 with $6,000,000 in your checking account. Your heirs will owe $2,000,000 in estate tax or would the $1,000,000 gift will reduce your $2 million exemption which means your heirs would of paid $2,500,000?
Consider your example and assumptions - the estate tax will be $2,000,000 and no unified credit would be allowed because lifetime taxable gift allowances is maxed out.
Total estate $6,000,000; taxable estate $4,000,000; estate taxes $2,000,000; no unified credit against estate taxes.