Order Code 95-416 A
Report for Congress
Received through the CRS Web
Federal Estate, Gift, and
Generation-skipping Taxes:
A Description of Current Law
Updated January 29, 2003
John R. Luckey
Legislative Attorney
American Law Division
Congressional Research Service ˜ The Library of Congress

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Federal Estate, Gift, and Generation-skipping Taxes:
A Description of Current Law
Summary
This report contains an explanation of the major provisions of the Federal estate,
gift, and generation-skipping transfer taxes. The discussion divides the Federal estate
tax into three components: the gross estate, deductions from the gross estate, and
computation of the tax, including allowable tax credits. The Federal estate tax is
computed through a series of adjustments and modifications of a tax base known as
the “gross estate.” Certain allowable deductions reduce the gross estate to the
“taxable estate,” to which is then added the total of all lifetime taxable gifts made by
the decedent. The tax rates are applied and, after reduction for certain allowable
credits, the amount of tax owed by the estate is reached.
This discussion divides the Federal gift tax into two components: the taxable
gift and the gift tax computation. The Federal gift tax is imposed on lifetime gifts of
property. The tax depends in large part upon the fundamental element—the value
of the “taxable gift.” The taxable gift is determined by reducing the gross value of
the gift by the available deductions and exclusions. The gift tax liability determined
on the basis of the donor’s taxable gifts may be reduced by the available unified
transfer tax credit.
The purpose of the generation-skipping transfer tax is to close a loophole in the
estate and gift tax system where property could be transferred to successive
generations without intervening estate or gift tax consequences. There are two basic
forms of generation-skipping transfers; the indirect skip, where the generation one
level below the decedent receives some beneficial interest in the property before the
property passes to the generation two or more levels below, and the direct skip, where
the property passes directly to the generation two or more levels below the decedent.
This discussion describes the tax on these types of transfers, its computation and
implementation, and use of such concepts as generation assignment and inclusion
ratios.
The Economic Growth and Tax Relief Reconciliation Act of 2001 generally
repealed the Federal estate and generation-skipping transfer taxes at the end of the
year 2009, provided for the phase out of these taxes over the period 2002 to 2009,
lowered and modified the gift tax, provided new income tax carry-over basis rules
for property received from a decedent, and made other general amendments which
will be applicable in the phase out period.
The phase out of the estate tax is to be
accomplished primarily by adjusting three features of the tax. The top rate is to be
gradually lowered. The applicable exclusion amount is to be gradually raised. The
credit for death taxes (estate or inheritance taxes) paid to a State is to be gradually
lowered and replaced by a deduction for such taxes. Also, the 5% surtax used to
recapture the benefits of the graduated tax rates on taxable estates of over
$10,000,000 is repealed, and, after the applicable exclusion amount has surpassed the
$1,300,000 level used to protect family owned businesses, the family owned business
deduction is repealed.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Federal Estate Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Gross Estate: The Federal Estate Tax Base . . . . . . . . . . . . . . . . . . . . . . 1
Deductions from the Gross Estate: Reaching the Taxable Estate . . . . . . . . . 4
Computation of the Estate Tax Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Federal Gift Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Taxable Gift . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Gift Tax Computation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Tax on Generation-Skipping Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Current Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

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Federal Estate, Gift, and Generation-
Skipping Taxes: A Description of Current
Law
Introduction
The Federal estate, gift, and generation-skipping tax laws are, necessarily, rather
lengthy and complex. This report discusses those major provisions which play the
dominant role in the determination of estate, gift, and generation-skipping tax
liability. The discussion relates only to the taxation of United States citizens and
resident aliens. Different rules apply to the taxation of nonresident alien individuals.
The Federal Estate Tax1
The Federal estate tax is computed through a series of adjustments and
modifications of a tax base known as the “gross estate.” Certain allowable
deductions reduce the gross estate to the “taxable estate,” to which is then added the
total of all lifetime taxable gifts made by the decedent. The tax rates are then applied
The result is the decedent’s estate tax which, after reduction for certain allowable
credits, is the amount of tax paid by the estate. This discussion will divide the
Federal estate tax into three components: the gross estate, deductions from the gross
estate, and computation of the tax, including allowable tax credits.
The Gross Estate: The Federal Estate Tax Base
The gross estate of a deceased individual includes both property owned by the
decedent on the date of the decedent’s death and certain interests in property which
the decedent had transferred to another person at some time prior to the date of death.
The conditions under which such property and interests in property may be included
in the decedent’s gross estate often constitute an important problem area in the
administration of the estate tax laws.
The gross estate of a decedent includes the value of all property, real or
personal, tangible or intangible, wherever situated, in which the deceased owned an
interest on the date of the decedent’s death.2 The property and interests in property
included in the decedent’s gross estate are valued at their fair market value on the
1 The Federal estate tax is entering a phase out period from 2002 to 2009, at the end of
which it will be repealed.
2 26 U.S.C. § 2031(a).

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date of death or, if elected by the executor, the alternate valuation date. The alternate
valuation date is the earlier of the date of distribution or disposition of the property
by the estate or the date six months after the date of death.3 The “fair market value”
of property is normally described as the price at which a willing buyer would
purchase the property and a willing seller would sell it, both being fully informed as
to all relevant facts. It is, consequently, the value of the property at its “highest and
best use,” rather than its current use.4 There is, however, a special rule under which
the real estate used in certain family farms and closely held businesses will, under
certain conditions, be valued for estate tax purposes at less than its highest and best
use.5
Certain types of property are included in a decedent’s gross estate under special
rules. The proceeds from a life insurance policy on the life of the deceased will be
included in the decedent’s gross estate if either the proceeds are payable to or for the
use of the executor or the estate, or if the decedent held any “incidents of ownership”
in the policy on the date of death or gave away such incidents of ownership within
three years of the date of death.6 An incident of ownership is an economic right in
the policy, such as the right to cancel the policy, change the beneficiary, or borrow
against its cash surrender value. The value of a survivor’s annuity payable because
of the death of the decedent will be included in the decedent’s gross estate if the
deceased had the right to receive a lifetime annuity under the same contract.7
The value of property owned by the decedent jointly with a right of survivorship
in another person, other than the decedent’s spouse, is fully included in the
decedent’s gross estate, except to the extent it can be shown that someone other than
the decedent contributed money or money’s worth of consideration towards the cost
of acquiring the property.8 Only one-half of the value of property owned jointly with
a right of survivorship by a decedent and the surviving spouse will be included in the
decedent’s gross estate, regardless of the relative contributions of the decedent and
the surviving spouse.9
3 26 U.S.C. § 2032(a). The alternate valuation date is useful when the value of the property
contained in the gross estate has decreased following the death of the decedent, such as
might be the case when the estate holds a substantial quantity of stock in a corporation in
which the decedent was a dominant figure.
4 Treas. Regs. (26 C.F.R.) § 20.2031-1(b).
5 26 U.S.C. § 2032A. An election for special use valuation may be made by the executor
where the majority of the estate is made up of closely-held business property. Under this
election the executor may choose to value the property at its closely-held business value
rather than its value at its highest and best use. The special use valuation cannot, however,
reduce the gross estate by more than $840,000 (This limit is indexed for inflation.).
6 26 U.S.C. § 2042.
7 26 U.S.C. § 2039(a). Annuities are valued according to the actuarial life expectancy of the
annuitant, the frequency of the payments, and the size of the payments. Treas. Regs. Sec.
20.2039-1.
8 26 U.S.C. § 2040(a).
9 26 U.S.C. 2040(b).

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In a number of instances, the value of a decedent’s gross estate includes the
value of property not owned by the decedent on the date of death. A decedent’s gross
estate includes the value of lifetime gifts over which the decedent retained a life
interest10 or a power to alter, amend, terminate, or destroy the beneficial enjoyment
of the property.11 The value of lifetime gifts which are not to take effect until the date
of death are also included in the donor’s gross estate.12
The gross estate includes the value of these types of property which have been
transferred, irrespective of the number of years which have elapsed between the date
of the gift and the date of the donor’s death. The value of property sold during the
decedent’s lifetime, for full and adequate consideration in money or money’s worth,
is not included in the decedent’s gross estate under these sections of the Internal
Revenue Code.
The gross estate, also, includes the value of interests in property given away
within three years of the date of death if, had the property been retained, it would
have been included in the decedent’s gross estate under one of the three special rules
noted above or under special rules for life insurance proceeds. Property given away
within three years of the date of death is also included in the decedent’s gross estate
for purposes of qualifying for certain estate and income tax benefits.13
The value of all property subject to a general power of appointment held by the
decedent on the date of death will be included in the decedent’s gross estate, even if
the decedent died without exercising the power. A power of appointment is a right,
held by a person other than the owner of property, to determine who will enjoy the
ownership of or benefit of the property. A power of appointment is “general” if it
may be exercised by its holder in favor of the holder, the holder’s estate, the holder’s
creditors, or the creditors of the holder’s estate. If a power cannot be exercised in
favor of these classes of persons, it is not a general power of appointment, regardless
of the size of the classes of beneficiaries in whose favor the power can be exercised.14
Deductions from the Gross Estate: Reaching the Taxable
Estate
10 26 U.S.C. § 2036. The retention of an estate, the duration of which is not ascertainable
except with reference to the lifetime of the donor, is also treated as a retained life interest,
as is the retention of the right to vote the stock of certain closely-held corporations. 26
U.S.C. § 2036(b); see also, United States v. Byrum, 408 U.S. 125 (1972).
11 26 U.S.C. § 2038. These transfers are also known as “revocable transfers” because the
retained power allowed the deceased donor to revoke the transfer and return to himself or
herself the enjoyment of the transferred property.
12 26 U.S.C. § 2037.
13 26 U.S.C. § 2035.
14 26 U.S.C. § 2041. Certain other powers are statutorily classified as limited or non-special
powers of appointment, including the right to invade the corpus (principal) subject to the
power, only under an ascertainable standard relating to health, education, support or
maintenance, or the non-cumulative right to withdraw up to the greater of $5,000 or 5% of
corpus annually.

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A decedent’s taxable estate is determined by reducing the gross estate by
allowable deductions, including estate administration expenses, certain debts and
losses, the amount of qualified transfers to a surviving spouse, charitable bequests
and certain family-owned business interests.
The first deduction to which an estate is entitled is for the funeral expenses,
administration expenses, claims against the estate, and unpaid mortgages paid by the
estate (to the extent not reflected in the reduced value of estate assets). These
payments may be deducted to the extent that they are paid by the estate and to the
extent they are allowable under the laws of the applicable jurisdiction in which the
estate is administered.15 Additionally, the estate may deduct the amount of any
casualty or theft losses sustained by the estate during settlement, to the extent such
losses are not compensated by insurance.16
The estate is, also, entitled to a “marital deduction” for the value of all property
passing to the decedent’s surviving spouse.17 Interests which may terminate in favor
of another person upon the lapse of time, the occurrence of an event or contingency,
or the failure of an event or contingency to occur, generally do not qualify for the
estate tax marital deduction.18 The estate tax marital deduction is allowed only for
non-terminable interests passing to the surviving spouse. These interests may pass
to the spouse under the terms of the decedent’s will, by law of intestacy, by contract,
by operation of law, or otherwise. Special exceptions to the terminable interest rule
are made for certain transfers in trust of a lifetime income interest if the executor
elects to include the value of the trust property in the surviving spouse’s gross estate,
and for certain life estates coupled with a general power of appointment, as well as
for certain life insurance settlement options and certain interests conditioned upon
survivorship for a reasonable period not exceeding six months.19
The gross estate is, also, reduced by the value of certain charitable bequests and
devises to qualified charitable organizations.20 An estate tax deduction is generally
permitted for any transfer which, if made during the decedent’s lifetime would have
been deductible for income tax purposes, though the rules are not identical.21
15 26 U.S.C. § 2053.
16 26 U.S.C. § 2054.
17 26 U.S.C. § 2056.
18 26 U.S.C. § 2056(b). Generally, the unlimited marital deduction is not allowed for
transfers to a surviving spouse who is not a citizen of the United States and does not become
a citizen before the estate tax return is filed unless the transfer utilizes a qualified domestic
trust. See, 26 U.S.C. § 2056(d). A qualified domestic trust is defined in 26 U.S.C. § 2056A
to be a trust which has at least one trustee who is a United States citizen and which citizen
trustee has veto power over distributions from the trust.
19 26 U.S.C. § 2056(b).
20 26 U.S.C. § 2055.
21 Compare, 26 U.S.C. §§ 2055(a) and 170(c).

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The gross estate may be reduced by the value of certain qualified family-owned
business interests. Under this deduction, the executor of a qualified estate is
empowered to elect special estate tax treatment for these qualified interests. The
deduction is limited to a total of $1,300,000 when combined with the applicable
exclusion amount of the unified credit.22 If an executor elects to use this deduction,
the estate tax liability is calculated as if the estate is allowed a maximum qualified
business deduction of $675,000 and an applicable exclusion amount of $625,000,
regardless of the year in which the decedent died. If the estate includes less than the
$675,000 of qualified family-owned business interests, the applicable exclusion
amount is increased on a dollar for dollar basis, limited to the applicable exclusion
amount generally available for the year of death.23
A “qualified estate”is defined to be the estate of a U.S. citizen or resident of
which the aggregate value of the decedent’s qualified family-owned business
interests that are passed to qualified heirs exceeds 50% of the decedent’s adjusted
gross estate.24 “Qualified heir” is defined to include any individual who has been
employed in the business for at least 10 years prior to the date of the decedent’s
death, and members of the decedent’s family.25 A “qualified family-owned business
interest” is defined as any interest in a business with principal place of business in
the U.S. if ownership of the business is held at least 50% by one family, 70% by two
families, or 90% by three families, as long as the decedent’s family owns at least
30% of the business.26 To qualify for this deduction the decedent (or a member of
his family) is required to have owned and materially participated in the business for
at least five of the eight years preceding the death of the decedent. Also, each
qualified heir is required to materially participate in the business for at least five
years of any eight year period within ten years following the decedent’s death.
22 26 U.S.C. § 2057.
23 26 U.S.C. § 2057(a)(2)&(3).
24 26 U.S.C. § 2057(b).
25 26 U.S.C. § 2057(I). Incorporated by reference is the definition of “family member” from
26 U.S.C. § 2032A(e)(1), which includes the individual’s spouse, the individual’s ancestors,
and the lineal descendants of the individual or his spouse or parent (and the spouses of such
lineal descendants).
26 26 U.S.C. § 2057(e).

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Computation of the Estate Tax Liability
Under the unified estate and gift tax system, computation of a decedent’s estate
tax liability requires a grossed-up, a combining, of the decedent’s lifetime taxable
gifts and the decedent’s taxable estate to which the tax rate schedule is applied. Then,
any available credits are taken to obtain the decedent’s actual estate tax liability.27
The estate rate schedule28 is as follows:
Taxable Estate
Tentative Tax
not over $10,000
18% of such amount
$10,000-$20,000
$1,800 + 20% of excess over $10,000
$20,000-$40,000
$3,800 + 22% of excess over $20,000
$40,000-$60,000
$8,200 + 24% of excess over $40,000
$60,000-$80,000
$13,000 + 26% of excess over $60,000
$80,000-$100,000
$18,200 + 28% of excess over $80,000
$100,000-$150,000
$23,800 + 30% of excess over $100,000
$150,000-$250,000
$38,800 + 32% of excess over $100,000
$250,000-$500,000
$70,800 + 34% of excess over $250,000
$500,000-$750,000
$155,800 + 37% of excess over $500,000
$750,000-$1,000,000
$248,300 + 39% of excess over $750,000
$1,000,000-$1,250,000
$345,800 + 41% of excess over $1,000,000
$1,250,000-$1,500,000
$448,300 + 43% of excess over $1,250,000
$1,500,000-$2,000,000
$555,800 + 45% of excess over $1,500,000
over $2,000,000
$780,800 + 49% of excess over $2,000,000
There are four major estate tax credits presently in effect: the unified transfer
tax credit, the credit for State death taxes, the credit for foreign death taxes, and the
credit for Federal estates taxes paid by previous estates. Each credit is a dollar-for-
dollar offset against an estate’s Federal estate tax liability.
The unified tax credit is available against both lifetime gift tax liabilities and the
estate tax liability. To the extent it is used to offset gift taxes, it is unavailable to
offset estate taxes. The credit is expressed in the code as an “applicable exclusion
amount,” i.e. the amount of taxable gifts or estate that the credit would cover. The
applicable exclusion amount in 2002 is $1,000,000. This amount is scheduled to
27 26 U.S.C. § 2001(b).
28 26 U.S.C. § 2001(c). The 55% and 53% brackets were repealed at the end of the year
2001. Each year from 2003 through 2007 the top bracket is scheduled to drop1% (2003 =
49%, 2004 = 48%, 2005 = 47%, 2006 = 46%, and 2007 -2009 = 45%) of the excess over
$2,000,000. For examples of use of this schedule and the applicable exclusion amount, see,
CRS Report RL31092, Calculating Estate Tax Liability During the Estate Tax Phasedown
Period, by Nonna A. Noto.

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increase during the phase out period to $3,500,000.29 The $3,500,000 applicable
exclusion amount is to be reached by a gradual phase-in as follows:
Year of Transfer
Applicable Exclusion Amount
2003
$1,000,000
2004-2005
$1,500,000
2006-2008
$2,000,000
2009
$3,500,000
Each estate is also allowed credits for State and foreign death taxes, including
estates, inheritance, legacy, or succession taxes actually paid by the estate or any heir
with respect to property included in the Federal gross estate.30 The Code contains a
table setting out the limits for the allowable State death tax credit, graduated by the
size of the adjusted taxable estate (the taxable estate less $60,000).31 The credit for
foreign death taxes is limited to the amount of U.S. estate taxes paid on the same
property. The credit is computed as the same proportionate share of the total U.S.
estate taxes as the value of the foreign taxed property bears to the total of the U.S.
taxable estate.32
The credit for previously taxed property (the PTP credit) is provided to relieve
some of the harshness that could otherwise result when an individual dies soon after
inheriting property upon which a Federal estate tax has already been imposed. The
PTP credit is allowed for all or some portion of the Federal estate taxes paid on
property transferred to the decedent within the past ten years. The PTP credit is
graduated according to the amount of time that has elapsed between the date the
property was transferred to the decedent and the date of death. The maximum PTP
credit is 100% of the previously paid taxes, when the decedent received the property
within the first two years prior to the date of death. The minimum PTP credit is 20%
of the previously paid taxes, when the decedent received the property during the
ninth and tenth years preceding the date of death.33
29 26 U.S.C. § 2010.
30 26 U.S.C. §§ 2011, 2014.
31 26 U.S.C. § 2011. This credit is to be phased out over the period 2002 to 2004 and be
replaced by a deduction in 2005. Prior to this phase-out, the maximum state death tax credit
was $1,082,800 plus 16% of the adjusted taxable estate above $10,040,000. The maximum
amount of the credit allowed in 2002 was 75% of the prior credit. In 2003 the maximum
amount of the credit is 50% of the pre-phase-out credit. In 2004,the maximum amount of
the credit will be 25% of the pre-phase-out credit.
32 26 U.S.C. § 2014.
33 26 U.S.C. § 2013.

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The Federal Gift Tax
The Federal gift tax is imposed on lifetime gifts of property.34 The tax depends
in large part upon the fundamental element—the value of the “taxable gift.” The
taxable gift is determined by reducing the gross value of the gift by the available
deductions and exclusions. The gift tax liability determined on the basis of the
donor’s taxable gifts may be reduced by the available unified transfer tax credit.
The Taxable Gift
Determining the amount of a taxable gift is fundamental to determining the
donor’s ultimate gift tax liability. The amount of the taxable gift is the fair market
value of the gift at the time it was made, less certain exclusions and deductions.35
The major deductions and exclusions are the annual per donee exclusion, the gift tax
marital deduction, and the gift tax charitable deduction.
Every donor may exclude from the Federal gift tax base the first $11,000 of cash
or property given to each donee annually. An unlimited exclusion is available for
gifts made by paying an individual’s tuition or medical expenses.36 The annual
exclusion is unavailable, however, for gifts of future interests which vest in the donee
only upon some future date. The present interest rule often requires complicated
drafting techniques to obtain the annual exclusion for the value of a gift of a life
insurance policy made in trust, or a gift to a minor, to be held in trust until the minor
reaches a certain age.37
The annual exclusion may be doubled through “gift-splitting,” in which one
spouse consents to being treated as having made one-half of the gifts made by his or
34 The word “gift” is not defined in the tax laws, but the Code does state that the amount of
a gift is ascertained when “property is transferred for less than an adequate and full
consideration in money or money’s worth..” 26 U.S.C. § 2512(b). Generally, the regulations
state that a gift is made, for gift tax purposes, when there is a transfer for inadequate
consideration and the transaction does not take place in a business context. Treas. Regs. §
25.2511. This should be distinguished from the definition of a “gift” for income tax
purposes, which requires that the transfer be made from “detached and disinterested
generosity.” Comm’r v. Duberstein, 363 U.S. 278 (1960). A transfer may, therefore, be a
gift for gift tax purposes, because there was no legally sufficient consideration, but not
constitute a gift for income tax purposes, because it was not motivated by detached and
disinterested generosity.
35 26 U.S.C. § 2512. Special valuation rules for valuation freezing transactions are set forth
in 26 U.S.C. § 2701 through 2704.
36 26 U.S.C. § 2503. This figure is indexed for inflation.
37 But see, 26 U.S.C. § 2503(c), for a special rule granting the annual exclusion for gifts to
certain trusts created for the benefit of minors which permit the income to be expended for
the benefit of the minor until the minor attains age 21, and requires the minor to be given
outright ownership of the trust assets at that age or, if the minor should die prior to attaining
age 21, to designate by will or otherwise the disposition of the property.

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her spouse in that taxable year.38 The election is made by a small notation on the gift
tax return, and results in each spouse receiving a $11,000 per donee exclusion for
one-half of the value of the same gift. Therefore, $22,000 per donee may be
excluded annually from tax by gift-splitting.
A deduction is also allowed for all of the value of certain interspousal gifts.39
Like its estate tax counterpart, no gift tax marital deduction is allowed for most gifts
of terminable interests.40
A donor may also deduct the value of certain charitable gifts. The value of the
gift may be deducted only if the charity is of a type described in the applicable
statutory provision, which contains most, but not all, of the same charities for which
deductible income tax contributions may be made.41
The division of property incident to a divorce or separation agreement may
result in the interspousal transfer of property for a consideration which is not
adequate for gift tax purposes. Consequently, the Code provides that interspousal
transfers pursuant to a written agreement dividing the property of the spouses and
occurring within two years before and one year after a decree of divorce will not be
treated as taxable gifts, as long as the marital rights of the spouses are settled by the
agreement or it provides for a reasonable allowance for the support of minor
children.42
The renunciation of property given one by another person might be viewed as
either the negation of the initial gift, resulting in no gift tax liability, or as a reciprocal
gift, resulting in two gift tax liabilities. If a disclaimer is made in writing, before the
donee has accepted any benefits of the property, and within nine months of the date
the gift was made, the gift will be ignored for gift tax purposes.43
38 26 U.S.C. § 2513. Gift-splitting also permits use of both spouses’ unified transfer tax
credits to eliminate present tax on lifetime taxable gifts.
39 26 U.S.C. § 2523(a).
40 26 U.S.C. § 2523(b),(f).
41 26 U.S.C. § 2522, compare, 26 U.S.C. § 170(c).
42 26 U.S.C. § 2516.
43 26 U.S.C. § 2518.

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The Gift Tax Computation
The tax on a taxable gift is measured initially by the value of the transferred
property, and is cumulative in nature.44 The applicable rate of tax on a taxable gift
is determined by the total of the donor’s lifetime taxable gifts. The applicable rate
of tax on each successive lifetime taxable gift is higher than on previous gifts. The
estate and gift tax rate tables are identical.45
The actual computation of the gift tax for each calendar year is completed in
three steps. First, the donor’s total taxable gifts for the calendar year and preceding
calendar periods are determined and the tax rate tables applied. Second, the tables
are applied to the total taxable gifts for preceding calendar periods. Third, the figure
from step two is subtracted from the figure in step one, and the total is reduced by
any of the donor’s unused unified transfer tax credits.46
The Tax on Generation-Skipping Transfers47
The Tax Reform Act of 1986 repealed the generation-skipping transfer tax,
enacted in 1976, as being unduly complicated and replaced it with a simplified flat-
rate tax.48
The purpose of the new generation-skipping transfer tax is the same as its 1976
predecessor, to close a loophole in the estate and gift tax system where property
could be transferred to successive generations without intervening estate or gift tax
consequences. The traditional generation-skipping transfers were trusts established
by a parent for the life time benefit of the children with the remainder passing to the
grandchildren. If properly drafted, no estate or gift tax would be imposed when the
trust corpus passed from the settlers children to the settlers grandchildren because the
estate tax is not imposed on interests which terminate at death.
There are two basic forms of generation-skipping transfers; the indirect skip,
where the generation one level below the decedent receives some beneficial interest
in the property before the property passes to the generation two or more levels below,
and the direct skip, where the property passes directly to the generation two or more
levels below the decedent. The 1976 law only taxed the indirect skip. The current
system taxes both types of transfers.
44 26 U.S.C. § 2501.
45 26 U.S.C. § 2001(c).
46 26 U.S.C. §§ 2502, 2001(c), 2505.
47 The Federal generation-skipping transfer tax is entering a phase out period from 2002 to
2009, at the end of which it will be repealed
48 Staff of the Joint Committee on Taxation, 100th Cong., 1st Sess., General Explanation of
the Tax Reform Act of 1986, 1263 (1987).

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The generation-skipping tax is a flat-rate tax. The rate is set at the highest estate
tax rate, currently 549.49 This tax rate is applied to three different events, a taxable
distribution, a taxable termination, or a direct skip.
A taxable distribution is a distribution from a trust, other than a taxable
termination or direct skip, to a skip person.50 A skip person is a person assigned to
a generation two or more generations below the transferor’s.51
A taxable termination is a termination by death, lapse of time, release of power,
or otherwise of an interest in property held in trust, unless immediately after the
termination a non-skip person has an interest in the property or at no time after the
termination may a distribution be made from the trust to a skip person.52
A direct skip is a transfer to a skip person. A transfer to a trust is a direct skip
if all the interests in the trust are held by skip persons.53
All persons are assigned a generation level under the statute. Persons related to
the transferor or spouse are assigned along family lines. For example, the transferor,
spouse, and brothers and sisters are in one generation, their children in the next and
grandchildren the next. Lineal descendants of a grandparent of the transferor or
spouse are assigned to generations on the same basis. Anyone ever married to a
lineal descendant of the transferor’s grandparent or the spouse’s grandparent are
assigned to the level of their spouse who was a lineal descendant. Non-relatives of
the transferor are assigned generations measured from the birth of the transferor.
Persons not more than 12 ½ years younger are treated as members of the same
generation as the transferor. Each 25 year period thereafter is treated as a new
generation. A grandchild of the transferor or spouse is moved up one generation if
his parents are deceased at the time of the transfer.54
Several exemptions are provided in the statutory scheme. For transfers made
prior to January 1, 1990, each grantor may exempt $2,000,000 in direct skips per
grandchild ($4,000,000 for married individuals who elect to treat the transfers as
made one-half by each).55 The exclusion for tuition and medical expense payments
from the gift tax56 are also excluded from the generation-skipping tax.57 The $11,000
49 26 U.S.C. § 2641(a). See, note 28 for schedule changes to this rate.
50 26 U.S.C. § 2612.
51 26 U.S.C. § 2613.
52 26 U.S.C. § 2612.
53 26 U.S.C. § 2612.
54 26 U.S.C. § 2651.
55 Pub. L. 99-514, § 1433(b)(3).
56 26 U.S.C. § 2503.
57 26 U.S.C. § 2611(b).

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annual exclusion of the gift tax is recognized against taxation of direct skips only.58
A $1,120,000 GST exemption is allowed to each individual for generation-skipping
transfers during life or at death.59 Again, the exemption is doubled for married
individuals who elect to treat the transfers as made one-half by each.60
The GST exemption may be allocated by the transferor or the executory to any
generation-skipping transfer. Once the allocation is made it is irrevocable. Unless
a contrary election is made, all or any portion of the exclusion not previously
allocated is deemed allocated to a lifetime direct skip to the extent necessary to make
the inclusion ratio for the transfer zero.61
The inclusion ratio is figured by subtracting from one a fraction, the numerator
of which is the portion of the GST exemption allocated to the transfer, the
denominator of which is the value of the property transferred.62 To compute the
generation-skipping tax, the value of the transfer is multiplied by the tax rate (49%)
and by the inclusion ratio.63
The liability for the tax is determined by the type of transfer. In the case of a
taxable distribution, the tax shall be paid by the transferee. The tax on taxable
terminations or direct skips from a trust shall be paid by the trustee. Direct skips,
other than those from a trust, are taxed to the transferor.64
Current Developments
The Economic Growth and Tax Relief Reconciliation Act of 200165 generally
repealed the Federal estate and generation-skipping transfer taxes at the end of the
year 2009, provided for the phase out of these taxes over the period 2002 to 2009,
lowered and modified the gift tax, provided new income tax carry-over basis rules
for property received from a decedent, and made other general amendments which
will be applicable in the phase out period.
The phase out of the estate tax is to be accomplished primarily by adjusting
three features of the tax. The top rate is to be gradually lowered. The applicable
exclusion amount is to be gradually raised. The credit for death taxes (estate or
58 26 U.S.C. § 2642(c).
59 26 U.S.C. § 2631. Starting in 2004, the GST exemption is to be equal to the estate tax
applicable exclusion amount. See, discussion of increases of the applicable exclusion
amount on page 7, above.
60 26 U.S.C. § 2652.
61 26 U.S.C. § 2632.
62 26 U.S.C. § 2642.
63 26 U.S.C. § 2641.
64 26 U.S.C. § 2603.
65 P.L. 107-16.

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inheritance taxes) paid to a State is to be gradually lowered and replaced by a
deduction for such taxes. Also, the 5% surtax used to recapture the benefits of the
graduated tax rates on taxable estates of over $10,000,000 is repealed, and, after the
applicable exclusion amount has surpassed the $1,300,000 level used to protect
family owned businesses, the family owned business deduction is repealed.

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