ȱ
ȱǰȱ ǰȱȱ Ȭȱ
¡Ǳȱȱȱȱȱ ȱ
ȱǯȱ¢ȱ
ȱ¢ȱ
416
¢ȱśǰȱŘŖŖşȱ
iki/CRS-95-
g/w
s.or
ak
le
://wiki
ttp
h
ȱȱȱ
ŝȬśŝŖŖȱ
ǯǯȱ
şśȬŚŗŜȱ
ȱȱȱ
Pr
epared for Members and Committees of Congress

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
¢ȱ
This report contains an explanation of the major provisions of the federal estate, gift, and
generation-skipping transfer taxes as they apply to transfers in 2009. This year is the final year of
the phase out of the federal estate tax and the generation-skipping tax. The discussion provides
basic principles about all three taxes and how they are computed.
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. The top rate for 2009 is 45% and the exclusion amount is $3,500,000.
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.
416
The gift tax liability determined on the basis of the donor’s taxable gifts may be reduced by the
unified lifetime gift tax credit ($1,000,000). The annual per donee exclusion is $13,000 ($26,000
for joint gifts) for 2009. The top rate for 2009 is 45%.
iki/CRS-95-
The purpose of the generation-skipping transfer tax is to close a perceived loophole in the estate
and gift tax system where property could be transferred to successive generations without
g/w
intervening estate or gift tax consequences. There are two basic forms of generation-skipping
s.or
ak
transfers; the indirect skip, where the generation one level below the decedent receives some
le
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
://wiki
below the decedent. This discussion describes the tax on these types of transfers, its computation
ttp
and implementation, and use of such concepts as generation assignment and inclusion ratios.
h
Two primary categories of legislation pertaining to transfer taxes may be expected to be
introduced in the 111th Congress. As the repeal of the estate and generation-skipping taxes is not
permanent, one category would make the repeal permanent. The second would reinstate these
taxes at lower rates and with a higher exclusion amount and/or in a manner more considerate of
family-owned business. Of course, there is also the possibility of taking no action and allowing
the sunset provision to take effect.

ȱȱȱ

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
ȱ
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.............................................. 3
Computation of the Estate Tax Liability ................................................................................... 4
The Federal Gift Tax........................................................................................................................ 6
The Taxable Gift........................................................................................................................ 6
The Gift Tax Computation ........................................................................................................ 7
The Tax on Generation-Skipping Transfers..................................................................................... 8
Current Developments................................................................................................................... 10

ȱ
416
Author Contact Information .......................................................................................................... 10

iki/CRS-95-
g/w
s.or
ak
le
://wiki
ttp
h
ȱȱȱ

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
ȱ
This report contains an explanation of the major provisions of the federal estate, gift, and
generation-skipping transfer taxes as they apply to transfers in 2009. This year is the final year of
the phase out of the federal estate tax and the generation-skipping tax.1
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.
ȱȱȱ¡ȱ
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
416
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
iki/CRS-95-
computation of the tax, including allowable tax credits.
g/w
s.or
ak
ȱ ȱǱȱȱȱȱ¡ȱȱ
le
The gross estate of a deceased individual includes both property owned by the decedent on the
://wiki
date of the decedent’s death and certain interests in property which the decedent had transferred
ttp
to another person at some time prior to the date of death. The conditions under which such
h
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 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

1 These two taxes are in the final year of an eight-year phase out period which was enacted as part of the Economic
Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 §§ 501, 511, 521. Under theses provisions, these taxes
will be repealed at the beginning of 2010, but see § 901, which provides for the sunset of the 2001 act, thus reinstituting
them at 2001 levels.
2 26 U.S.C. § 2031(a).
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.
ȱȱȱ
ŗȱ

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
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
416
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
iki/CRS-95-
g/w
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
s.or
ak
lifetime gifts over which the decedent retained a life interest10 or a power to alter, amend,
le
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
://wiki
ttp
The gross estate includes the value of these types of property which have been transferred,
h
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

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 $1,000,000 in 2009 (This limit is indexed for inflation each year).
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).
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.
ȱȱȱ
Řȱ

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
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
416
ȱȱȱ ȱǱȱȱȱ¡ȱȱ
iki/CRS-95-
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
g/w
transfers to a surviving spouse, charitable bequests, and State death taxes.15
s.or
ak
le
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
://wiki

ttp
13 26 U.S.C. § 2035.
h
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.
15 Prior to 2004, the gross estate could be reduced by the value of certain qualified family-owned business interests.
Under this deduction, the executor of a qualified estate was empowered to elect special estate tax treatment for these
qualified interests. The deduction was limited to a total of $1,300,000 when combined with the applicable exclusion
amount of the unified credit. If an executor elected to use this deduction, the estate tax liability was calculated as if the
estate was 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 included less than the $675,000 of qualified
family-owned business interests, the applicable exclusion amount was increased on a dollar for dollar basis, limited to
the applicable exclusion amount generally available for the year of death.
A “qualified estate” was 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 were passed to qualified heirs exceeded 50% of the
decedent’s adjusted gross estate. “Qualified heir” was defined to include any individual who had 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. A
“qualified family-owned business interest” was defined as any interest in a business with principal place of business in
the U.S. if ownership of the business was held at least 50% by one family, 70% by two families, or 90% by three
families, as long as the decedent’s family owned at least 30% of the business. To qualify for this deduction the
decedent (or a member of his family) was 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 was 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. 26 U.S.C. § 2057 prior to repeal by P.L. 107-16 § 521(d).
ȱȱȱ
řȱ

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
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.16 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.17
The estate is also entitled to a “marital deduction” for the value of all property passing to the
decedent’s surviving spouse.18 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.19 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.20
416
The gross estate is also reduced by the value of certain charitable bequests and devises to
qualified charitable organizations.21 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
iki/CRS-95-
purposes, though the rules are not identical.22
g/w
The gross estate is also reduced by the amount of any estate, inheritance, legacy, or succession
s.or
ak
taxes actually paid to any State or the District of Columbia in respect to property included in the
le
gross estate.23
://wiki
ttp
ȱȱȱȱ¡ȱ¢ȱ
h
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.24

16 26 U.S.C. § 2053.
17 26 U.S.C. § 2054.
18 26 U.S.C. § 2056.
19 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.
20 26 U.S.C. § 2056(b).
21 26 U.S.C. § 2055.
22 Compare, 26 U.S.C. §§ 2055(a) and 170(c).
23 26 U.S.C. § 2058. Prior to 2005, a credit was allowed for such taxes under 26 U.S.C. § 2011. See, footnote 26 infra.
24 26 U.S.C. § 2001(b).
ȱȱȱ
Śȱ

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
The estate rate schedule25 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
416
$1,250,000-$1,500,000
$448,300 + 43% of excess over $1,250,000
$1,500,000 +
$555,800 + 45% of excess over $1,500,000
iki/CRS-95-

g/w
There are three major estate tax credits26 presently in effect: the unified transfer tax credit, the
s.or
ak
credit for foreign death taxes, and the credit for federal estates taxes paid by previous estates.
le
Each credit is a dollar-for-dollar offset against an estate’s federal estate tax liability.
://wiki
The unified tax credit is available against both lifetime gift tax liabilities and the estate tax
ttp
liability. Up to $1,000,000 may be used against lifetime gifts. To the extent it is used to offset gift
h
taxes, it is unavailable to offset estate taxes. The credit is expressed in the code as an “applicable
exclusion amount,” that is, the amount of taxable gifts or estate that the credit would cover. The
applicable exclusion amount in 2009 is $3,500,000.27
Each estate is also allowed credits for foreign death taxes, including estate, inheritance, legacy, or
succession taxes actually paid by the estate or any heir with respect to property included in the
federal gross estate. This credit is limited to the amount of U.S. estate taxes paid on the same

25 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 drop 1% (2003 = 49%, 2004 = 48%, 2005 = 47%, 2006 = 46%, and 2007 -
2009 = 45%). 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 2001-2009, by Nonna A. Noto.
26 Prior to 2005, there was a fourth credit, that for State death taxes. 26 U.S.C. § 2011. This credit was phased out over
the period 2002 to 2004 and 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 was 50% of the pre-phase-out
credit. In 2004, the maximum amount of the credit was 25% of the pre-phase-out credit. The Code contained 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).
27 26 U.S.C. § 2010.
ȱȱȱ
śȱ

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
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.28
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.29
ȱȱ ȱ¡ȱ
The federal gift tax is imposed on lifetime gifts of property.30 The tax depends in large part upon
416
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.
iki/CRS-95-
g/w
ȱ¡ȱ ȱ
s.or
ak
le
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
://wiki
made, less certain exclusions and deductions.31 The major deductions and exclusions are the
ttp
annual per donee exclusion, the gift tax marital deduction, and the gift tax charitable deduction.
h
Every donor may exclude from the federal gift tax base the first $13,000 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.32 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

28 26 U.S.C. § 2014.
29 26 U.S.C. § 2013.
30 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.
31 26 U.S.C. § 2512. Special valuation rules for valuation freezing transactions are set forth in 26 U.S.C. § 2701
through 2704.
32 26 U.S.C. § 2503. This figure is indexed for inflation.
ȱȱȱ
Ŝȱ

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
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.33
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 her spouse in that taxable year.34
The election is made by a small notation on the gift tax return, and results in each spouse
receiving a $13,000 per donee exclusion for one-half of the value of the same gift. Therefore,
$26,000 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.35 Like its estate tax
counterpart, no gift tax marital deduction is allowed for most gifts of terminable interests.36
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.37
The division of property incident to a divorce or separation agreement may result in the
416
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
iki/CRS-95-
are settled by the agreement or it provides for a reasonable allowance for the support of minor
g/w
children.38
s.or
ak
The renunciation of property given one by another person might be viewed as either the negation
le
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
://wiki
property, and within nine months of the date the gift was made, the gift will be ignored for gift tax
ttp
purposes.39
h
ȱ ȱ¡ȱȱ
The tax on a taxable gift is measured initially by the value of the transferred property, and is
cumulative in nature.40 The applicable rate of tax on a taxable gift is determined by the total of the

33 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.
34 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.
35 26 U.S.C. § 2523(a).
36 26 U.S.C. § 2523(b),(f).
37 26 U.S.C. § 2522, compare, 26 U.S.C. § 170(c).
38 26 U.S.C. § 2516.
39 26 U.S.C. § 2518.
40 26 U.S.C. § 2501.
ȱȱȱ
ŝȱ

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
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.41
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 gift tax credit, up to the
$1,000,000 limit.42
ȱ¡ȱȱ Ȭȱȱ
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.43 The purpose of the
resulting 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
416
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 settlor’s children to the settlor’s grandchildren because the estate tax
is not imposed on interests which terminate at death.
iki/CRS-95-
g/w
There are two basic forms of generation-skipping transfers; the indirect skip, where the
s.or
generation one level below the decedent receives some beneficial interest in the property before
ak
the property passes to the generation two or more levels below, and the direct skip, where the
le
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.
://wiki
ttp
h
The generation-skipping tax is a flat-rate tax. The rate is set at the highest estate tax rate, currently
45%.44 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.45 A skip person is a person assigned to a generation two or more generations
below the transferor’s.46
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

41 26 U.S.C. § 2001(c).
42 26 U.S.C. §§ 2502, 2001(c), 2505.
43 Staff of the Joint Committee on Taxation, 100th Cong., 1st Sess., General Explanation of the Tax Reform Act of 1986,
1263 (1987). The federal generation-skipping transfer tax is in a phase out period from 2002 to 2009, at the end of
which it will be repealed.
44 26 U.S.C. § 2641(a).
45 26 U.S.C. § 2612.
46 26 U.S.C. § 2613.
ȱȱȱ
Şȱ

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
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.47
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.48
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 12½ 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.49
Several exemptions or exclusions are provided in the statutory scheme.50 The exclusions for
416
tuition and medical expense payments from the gift tax51 also apply to the generation-skipping
tax.52 The $13,000 per donee annual exclusion from the gift tax is recognized against taxation of
direct skips only.53 A $3,500,000 GST exemption is allowed to each individual for generation-
skipping transfers during life or at death.54 Again, the exemption is doubled for married
iki/CRS-95-
individuals who elect to treat the transfers as made one-half by each.55
g/w
The GST exemption may be allocated by the transferor or the executor to any generation-skipping
s.or
ak
transfer. Once the allocation is made it is irrevocable. Unless a contrary election is made, all or
le
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.56
://wiki
ttp
The inclusion ratio is figured by subtracting from one a fraction, the numerator of which is the
h
portion of the GST exemption allocated to the transfer, the denominator of which is the value of
the property transferred.57 To compute the generation-skipping tax, the value of the transfer is
multiplied by the tax rate (45%) and by the inclusion ratio.58

47 26 U.S.C. § 2612.
48 26 U.S.C. § 2612.
49 26 U.S.C. § 2651.
50 P.L. 99-514, § 1433(b)(3) provided that for transfers made prior to January 1, 1990, each grantor could 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).
51 26 U.S.C. § 2503.
52 26 U.S.C. § 2611(b).
53 26 U.S.C. § 2642(c).
54 26 U.S.C. § 2631. The GST exemption is to be equal to the estate tax applicable exclusion amount.
55 26 U.S.C. § 2652.
56 26 U.S.C. § 2632.
57 26 U.S.C. § 2642.
58 26 U.S.C. § 2641.
ȱȱȱ
şȱ

ȱǰȱ ǰȱȱ Ȭȱ¡Ǳȱȱȱȱȱ ȱ
ȱ
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.59
ȱȱ
The Economic Growth and Tax Relief Reconciliation Act of 200160 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. The phase out of the
estate tax was accomplished primarily by adjustment to two features of the tax. The top rate was
gradually lowered. The applicable exclusion amount was gradually raised to $3,500,000. Absent
Congressional action, the estate and generation-skipping taxes will be repealed for the year 2010,
but all three transfer taxes will revert to 2001 levels in 2011 under the sunset provision of the
2001 act.61
416
Two primary categories of legislation pertaining to transfer taxes may be expected to be
introduced in the 111th Congress. As noted above, the repeal of the estate and generation-skipping
taxes is not permanent. One category would make the repeal permanent. The second would
reinstate these taxes at lower rates and with a higher exclusion amount and/or in a manner more
iki/CRS-95-
considerate of family-owned business. Of course, there is also the possibility of taking no action
g/w
and allowing the sunset provision to take effect.
s.or
ak

le
ȱȱȱ
://wiki
ttp
h

John R. Luckey

Legislative Attorney
jluckey@crs.loc.gov, 7-7897

59 26 U.S.C. § 2603.
60 P.L. 107-16.
61 Id. at § 901.
ȱȱȱ
ŗŖȱ