Q: What does it mean that the gift tax is tax excluve, while the estate tax is tax inclusive?
A: When you figure the amount of a gift, you DON'T include that tax you are going to pay on it, so there is no tax on the tax. On the other hand, when your figure the estate tax, to DO figure it on the entire net estate--you get no deduction for the amount of estate tax you will pay. So you do pay tax on the tax.
For example, if the tax rate were a flat 50%, and all your unified credit is consumed. If you gave a $2 million gift, you would pay $1 million tax. You are out of pocket $3 million. Taxes ate 1/3, and your beneficiary got 2/3. If, on the other hand, you died with $3 million, you'd pay 1.5 million in tax, and your heirs would only get the other 1.5 million. So, while the stated rate of tax is the same, you pay more with an estate tax than with a gift tax.