Federal Estate, Gift, and Generation-Skipping
Taxes: A Description of Current Law
John R. Luckey
Legislative Attorney
May 4, 2012
Congressional Research Service
7-5700
www.crs.gov
95-416
CRS Report for Congress
Pr
epared for Members and Committees of Congress
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 as they apply to transfers in 2012. The discussion provides
basic principles to be applied in the computation of these three transfer taxes.
The federal estate and generation-skipping taxes were resurrected by the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) after a
hiatus of one year (2010). This act also provided elective options for estates of those who died in
2010.
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 2012 is 35% and the exclusion amount is $5,120,000.
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.
The gift tax liability determined on the basis of the donor’s taxable gifts may be reduced by the
unified lifetime credit (which covers the excludible amount of $5,120,000). The annual per donee
exclusion is $13,000 ($26,000 for joint gifts) for 2012. The top rate for 2012 is 35%.
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
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
flat rate for this tax in 2012 is 35%.
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Federal Estate, Gift, and Generation-Skipping Taxes: A Description of Current Law
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.............................................. 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
Elections Available to Estates of Individuals Who Died in 2010 .................................................. 10
Contacts
Author Contact Information........................................................................................................... 11
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Federal Estate, Gift, and Generation-Skipping Taxes: A Description of Current Law
Introduction
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 2012. The enactment of the
Economic Growth and Tax Relief Reconciliation Act of 20011 phased out the estate and
generation-skipping taxes over a 10-year period, leaving the gift tax as the only federal transfer
tax in 2010. The year 2010 was the first since 1916 in which there was no federal estate tax.
There was also a year hiatus for the generation-skipping tax. The Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 20102 temporarily (through the end of 2012)
reinstated the estate and generation-skipping taxes with lower top rates and larger exemptions and
reunified the estate and gift taxes.
The federal estate and gift taxes are unified. This means that these taxes have the same rate
structure. There, also, is one lifetime credit which may be applied to these taxes. For 2012 the
unified credit covers an applicable amount of $5,120,000.
The federal estate, gift, and generation-skipping tax laws are 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 Tax
The federal estate tax is a tax on the estate of a decedent, levied against and paid by the estate, as
opposed to an inheritance tax which is imposed on and paid by the heirs of the decedent based
upon what they receive. 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.
1 P.L. 107-16, 107th Cong., 1st Sess. (2001).
2 P.L. 111-312, 111th Cong. 2nd Sess. (2010).
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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.3 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.4 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.5 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.6
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.7 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.8
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.9 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.10
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 interest11 or a power to alter, amend,
3 26 U.S.C. § 2031(a).
4 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.
5 Treas. Regs. (26 C.F.R.) § 20.2031-1(b).
6 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 $1,040,000 in 2012 (This limit is indexed for inflation each year).
7 26 U.S.C. § 2042.
8 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.
9 26 U.S.C. § 2040(a).
10 26 U.S.C. 2040(b).
11 26 U.S.C. § 2036. The retention of an estate, the duration of which is not ascertainable except with reference to the
(continued...)
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terminate, or destroy the beneficial enjoyment of the property.12 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.13 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.14
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.15
Deductions from the Gross Estate: Reaching the Taxable Estate
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 State death taxes.
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.16 Additionally, the estate may deduct the amount
(...continued)
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).
12 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.
13 26 U.S.C. § 2037.
14 26 U.S.C. § 2035.
15 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.
16 26 U.S.C. § 2053.
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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
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
purposes, though the rules are not identical.22
The gross estate is also reduced by the amount of any estate, inheritance, legacy, or succession
taxes actually paid to any State or the District of Columbia in respect to property included in the
gross estate.23
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.24
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.
24 26 U.S.C. § 2001(b).
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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 $150,000
$250,000-$500,000
$70,800 + 34% of excess over $250,000
$500,000 +
35% of excess over $500,000
There are three major estate tax credits presently in effect: the unified transfer tax credit, the
credit for foreign death taxes, and the credit for federal estate 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 this credit 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,” that is, the amount of
taxable gifts or estate that the credit would cover. The applicable exclusion amount in 2012 is
$5,120,000.26 A surviving spouse may also use any unused applicable exclusion amount of their
spouse.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
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
25 26 U.S.C. § 2001(c). Because of the applicable exclusion amount of $5,120,000, estates which actually pay the
federal estate tax have basically a flat rate of 35%.
26 26 U.S.C. § 2010.
27 26 U.S.C. § 2010(c).
28 26 U.S.C. § 2014.
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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 or tenth years preceding the date of
death.29
The Federal Gift Tax
The federal gift tax is imposed on lifetime gifts of property.30 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.31 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 $13,000 of cash or property given
to each donee annually.32 An unlimited exclusion is available for gifts made by paying an
individual’s tuition or medical expenses. 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.33
Married couples may double the annual exclusion through “gift-splitting,” an arrangement in
which one spouse consents to being treated as having made one-half of the gifts made by his or
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.
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.
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her spouse in that taxable year.34 The election is made by a 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, married couples may annually exclude $26,000 per donee 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
describes most, but not all, of the 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
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.38
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.39
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.40 The applicable rate of tax on a taxable gift is determined by the total of the
donor’s lifetime taxable 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 taxable gifts for the calendar year and any preceding calendar periods are totaled and the
tentative tax determined. Second, the tentative tax is calculated on the total taxable gifts for
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.
41 26 U.S.C. § 2001(c).
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preceding calendar periods. Third, the result from step two is subtracted from the result of step
one, and the donor’s unused unified tax credit is applied to the remaining amount.42
The Tax on Generation-Skipping Transfers
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 predecessor, to close a loophole in the
estate and gift tax system where property could be transferred to successive generations without
paying multiple estate or gift taxes. 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 settlor’s children to the settlor’s 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 (e.g., children) receives some beneficial interest in the
property before the property passes to the generation two or more levels below (e.g.,
grandchildren), and the direct skip, where the property passes directly to the generation two or
more levels below the decedent (e.g., grandchildren). The 1976 law only taxed the indirect skip.
The current system taxes both types of transfers.
The generation-skipping tax is a flat-rate tax. The rate is set at the highest estate tax rate, currently
35%.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
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
42 26 U.S.C. §§ 2502, 2001(c), 2505. P.L. 111-312 restored the total unification of the unified credit so that the full
applicable exclusion amount is available to offset gifts. The 35% top rate must be used for computing the amount of
credit used when grossing up any previously made gifts where a higher rate was used.
43 Staff of the Joint Committee on Taxation, 100th Cong., 1st Sess., General Explanation of the Tax Reform Act of 1986,
1263 (1987). P.L. 11-312 brought back the generation-skipping transfer tax after a hiatus for 2010.
44 26 U.S.C. § 2641(a).
45 26 U.S.C. § 2612.
46 26 U.S.C. § 2613.
47 26 U.S.C. § 2612.
48 26 U.S.C. § 2612.
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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
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 (i.e., where the property passes directly to the generation two or more levels
below the decedent).53 A $5,120,000 GST exemption is allowed to each individual for generation-
skipping transfers during life or at death.54 Again, the exemption is doubled for married
individuals who elect to treat the transfers as made one-half by each.55
The GST exemption may be allocated by the transferor or the executor 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.56
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.57 To compute the generation-skipping tax, the value of the transfer is
multiplied by the tax rate (35%) and by the inclusion ratio.58
The liability for the tax is determined by the type of transfer. In the case of a taxable distribution,
the tax is paid by the transferee. The tax on taxable terminations or direct skips from a trust is
paid by the trustee. Direct skips, other than those from a trust, are taxed to the transferor.59
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.
59 26 U.S.C. § 2603.
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Federal Estate, Gift, and Generation-Skipping Taxes: A Description of Current Law
Elections Available to Estates of Individuals Who
Died in 2010
The year 2010 was the first since 1916 in which there was no federal estate tax, but heirs of
decedents who died in 2010 were subject to carry-over basis in inherited property. There was also
a year hiatus for the generation-skipping tax. The Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 201060 temporarily (through the end of 2012) reinstated
the estate and generation-skipping taxes with lower top rates and larger exemptions, reunified the
estate and gift taxes, and reinstituted stepped-up basis rules (discussed below) for property
received from a decedent. The act provided for an election for 2010 estates to either use the carry-
over basis rules which were in effect in 2010 or opt to have the reinstated estate tax regimen
apply to the estate, with the benefit of the stepped-up basis rules. Which option is more beneficial
depends on the size of the estate, whether the assets are to be sold, and the nature and basis of the
property in the estate.
Technically, basis rules are income tax rules, not estate tax rules. Basis is used to determine gain
on the sale of capital assets for income tax purposes. Often basis and cost are equivalent.
Generally, to determine taxable income from sale of a capital asset, the basis in that asset is
subtracted from the sale price. Prior to 2010 and currently the basis in property received from a
decedent was/is a “stepped-up” basis.61 The inheritor of property, instead of having the basis of
the one from whom he received the property (a carry-over basis), has a basis in the property of its
fair market value at the date of death of the decedent. The purpose of the stepped-up basis rule is
to avoid double taxation. The property has been subject to the estate tax. If the property had a
carry-over basis and was sold after inheritance, there would be a capital gain subject to the
income tax. The use of the stepped-up basis eliminates this capital gain and thus the income tax
on the sale.
In 2010 there was no federal estate tax. Therefore, there was no chance of this type of double
taxation and thus this need for the stepped-up basis rules was removed. In 2010 the basis in
property received from a decedent was the lesser of carry-over basis or the fair market value of
the property on the date of death of the decedent.62 Under the estate tax and the income tax
stepped-up basis rules, an amount of the gross estate was not subject to either tax.63 To avoid
penalizing decedents with estates below the estate tax threshold (whose property would have
otherwise received a carry-over basis), two amounts of property received from a decedent still
received stepped-up basis. Every estate could allocate $1,300,000 basis increase to property in the
estate.64 In addition to this general step-up, property which passed to the spouse of the decedent
could be allocated up to $3,000,000 basis increase.65
60 P.L. 111-312, 111th Cong. 2nd Sess. (2010).
61 26 U.S.C. § 1014.
62 P.L. 107-16, § 542.
63 The applicable exclusion amount and all property passing to the spouse under the unlimited marital deduction would
not be subject to the estate tax while still receiving the stepped-up basis and thus avoiding the income tax on the
subsequent sale of the property.
64 P.L. 107-16, § 542. A decedent who is a nonresident and not a citizen is limited to a $60,000 step-up.
65 P.L. 107-16, § 542.
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Federal Estate, Gift, and Generation-Skipping Taxes: A Description of Current Law
Author Contact Information
John R. Luckey
Legislative Attorney
jluckey@crs.loc.gov, 7-7897
Congressional Research Service
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