A History of Federal Estate, Gift, and Generation-Skipping Taxes
Prepared for Members and Committees of Congress
Since 1976, the federal transfer tax system has included an estate tax, gift tax, and generation-
skipping tax. The estate and gift transfer taxes have been part of the federal revenue system, off
and on, since the earliest days of the United States. The Economic Growth and Tax Relief
Reconciliation Act of 2001 (P.L. 107-16) provided for a phaseout of the estate and generation-
skipping taxes over a 10-year period, leaving the gift tax as the only federal transfer tax. It is
important to note that, as structured in this act, the repeal of the estate and generation-skipping
taxes is not permanent. Unless revised, these taxes are to be reinstated at 2001 levels in 2011.
Two primary categories of legislation pertaining to transfer taxes may be expected to be th
introduced in the 111 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/or in a manner more considerate of family-owned
In this report, the history of the federal transfer taxes has been divided into four parts: (1) the
federal death and gift taxes used between 1789 and 1915; (2) the development, from 1916
through 1975, of the modern estate and gift taxes; (3) the creation and refinement of a unified
estate and gift tax system, supplemented by a generation-skipping transfer tax; and (4) the
phaseout and repeal of the estate and generation-skipping taxes, with the gift tax being retained as
a device to protect the integrity of the income tax.
Introduc tion ..................................................................................................................................... 1
Death and Gift Taxes in the United States: 1789-1915...................................................................2
The Death Stamp Tax: 1789-1802.............................................................................................2
The Civil War Inheritance Taxes: 1862-1870............................................................................2
An Income Tax on Gifts and Inheritance: 1894........................................................................4
Modified Estate Tax: 1898-1902...............................................................................................4
Reasons for Federal Death Taxes: 1789-1915...........................................................................5
Development of the Modern Federal Estate and Gift Taxes: 1916-1975........................................5
The Revenue Act of 1916..........................................................................................................5
Rate Increases: 1917.................................................................................................................6
Estate Tax Fluctuations and a Brief Gift Tax: 1918-1926.........................................................7
Estate Tax Rate Increases and a Permanent Gift Tax: 1932-1941.............................................8
Further Rate Adjustments and the Marital Deduction: 1942-1948...........................................9
Changes in the Estate Taxation of Life Insurance: 1954.........................................................10
Restructuring of the Federal Transfer Tax System: 1976-1998.....................................................10
The Tax Reform Act of 1976...................................................................................................10
The Revenue Act of 1978........................................................................................................12
The Crude Oil Windfall Profits Tax Act of 1980....................................................................13
The Economic Recovery Tax Act of 1981..............................................................................13
The Deficit Reduction Act of 1984.........................................................................................15
The Tax Reform Act of 1986...................................................................................................16
The Omnibus Budget Reconciliation Act of 1987..................................................................16
The Technical and Miscellaneous Revenue Act of 1988.........................................................17
The Revenue Reconciliation Act of 1989...............................................................................18
The Omnibus Reconciliation Act of 1990...............................................................................19
The Omnibus Reconciliation Act of 1993...............................................................................20
The Taxpayer Relief Act of 1997............................................................................................20
The Internal Revenue Service Restructuring and Reform Act of 1998...................................21
Phaseout and Repeal of the Federal Estate and Generation-Skipping Taxes................................22
Repeal of the Estate and Generation-Skipping Transfer Taxes...............................................22
Phaseout of the Estate and Generation-Skipping Transfer Taxes............................................22
Modification of The Gift Tax..................................................................................................23
Basis Rules for Property Received from a Decedent..............................................................24
Other Amendments..................................................................................................................24 th
The 111 Congress Legislation...............................................................................................25
Conclusion ..................................................................................................................................... 25
Table 1. Applicable Exclusion amount and Family-Owned Business Exclusion..........................20
Table 2. Schedule of Changes........................................................................................................23
Author Contact Information..........................................................................................................25
The concept of a death tax and the controversies surrounding such taxes have ancient roots. There
is evidence of a 10 percent tax on transfers of property at death in ancient Egypt, as early as 700 1
B.C. Later, the Greeks and Romans adopted death taxes. Critics of such taxes may trace their
grievances at least to Pliny the Younger, who charged that a death tax was “an unnatural tax 2
augmenting the grief and sorrow of the bereaved.”
The gift tax has developed as a necessary concomitant to the death tax because the easiest way to
escape a tax on the gratuitous transfer of property at death is to divest oneself of the property
during life. The impact of either tax alone would be diminished by the escape offered by the 3
Starting in 1976, Congress almost completely restructured the federal transfer tax system. The
estate and gift taxes were unified. The scope of these taxes was changed in terms of size of estates
affected. Perceived loopholes of major importance were closed or narrowed. Certain groups,
previously thought to have suffered excessive tax burdens, were afforded relief. A new tax, the
generation-skipping transfer tax, was added to supplement these two other transfer taxes.
The enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001,4 begins a
movement away from the use of transfer taxes. This act phases out the estate and generation-
skipping taxes over a ten year period, leaving the gift tax as the only federal transfer tax. The
repeal of the estate tax would leave the United States without a federal estate tax for the first time
This report details the history of the three federal transfer taxes, tracing their development from 5
their eighteenth century roots to the present.
1 Randolph E. Paul, Federal Estate and Gift Taxation, p. 3 (Boston 1942), William J. Schultz, The Taxation of
Inheritance, p. 3 (New York, 1926); and Max West, The Inheritance Tax, p. 11 (New York, 1908). See also, Knowlton
v. Moore, 178 U.S. 41, 49 (1900).
2 William J. Schultz, The Taxation of Inheritance, p. 6 (New York 1926). The Roman death taxes were adopted by
Emperor Augustus in 6 A.D. See also, Max West, The Inheritance Tax, p. 11 (New York, 1908); and 3 Adam Smith,
The Wealth of Nations, p. 311 (London, 1811). For a discussion of the complexities of estate planning in ancient
Greece, see, Anton-Herman Chroust, Estate Planning in Hellenic Antiquity: Aristotle’s Last Will and Testament, 45
Notre Dame Lawyer 629 (1969).
3 The history of using inter vivos transfers to evade death taxes may be traced to Egypt in the seventh century, B.C.. As
noted by one author:
“Another inscription [Egyptian hieroglyphics] records a sale of property by an old man to his sons
at a nominal price, apparently for the purpose of avoiding the inheritance tax.”
Max West, The Inheritance Tax, pp. 11-12 (New York, 1908).
4 P.L. 107-16, 107th Cong., 1st Sess. (2001).
5 For a summary and description of current law in this area, please see, CRS Report 95-416, Federal Estate, Gift, and
Generation-Skipping Taxes: A Description of Current Law, by John R. Luckey.
Prior to 1916, the United States did not make regular use of death and gift taxes. The federal
government turned to them only in time of extraordinary revenue demands, such as wartime,
although individual states used them extensively.
The federal experience with death taxes began in the eighteenth century, when strained trade
relations with France necessitated development of a strong naval force. In 1794, a special revenue
committee of the House of Representatives recommended that a system of stamp duties be
adopted to meet the resultant revenue needs. The recommended duties included a tax:
On inventories of the effects of deceased persons, ten cents.
On receipts for legacies, or shares of personal estate, where the sum is above $50 and not
exceeding $100, twenty-five cents; more than $100 and not exceeding $500, fifty cents; for
every further sum above $500, a dollar. Not to extend to wives, children or grandchildren.
On probates of wills, and letters of administration, fifty cents.6
In 1796, the House Committee on Ways and means reported to Congress a bill to adopt such a 7
tax and the tax was enacted in 1797.
The Stamp Act of July 6, 1797,8 required the use of federal stamps on receipts and discharges
from legacies and intestate shares, and levied a charge for the purchase of the required stamps.
The rate structure recommended by the special revenue committee in 1794 was adopted, along 9
with exemptions for distributions to a wife (but not a husband), or a child or grandchild. The 10
stamp tax continued in force until 1802, when it was repealed. For the next 60 years, the federal
tax structure endured without any form of death tax.
The Civil War period was important in the development of the federal estate and gift tax system.
The Revenue Act of 1862 introduced the first federal gift tax and included a number of features
which have become important parts of the present federal estate, gift, and generation-skipping tax
laws, including taxation of certain lifetime transfers of a testamentary character and exemption of
6 1 American State Papers in Finance 277.
7 Annals of Congress, 4th Cong., 1st Sess. 993 (1796). The tax proposed by the Ways and means Committee, however,
was not graduated, unlike the 1794 recommendation. The Ways and Means proposal called for a flat 2 percent levy and
exempted property passing to parents, husbands, and lineal descendants.
8 Act of July 6, 1797, 1 Stat. 527.
9 The policy of favorable tax treatment of transfers to a spouse has continued into present law, which affords special
estate and gift tax deductions for certain interspousal transfers. 26 U.S.C. §§ 2056, and 2523.
10 Act of April 6, 1802, 2 Stat. 148.
small estates. During the debate on the act, Congress considered for the first time special 11
treatment of charitable transfers.
The use of a federal death tax was revived in 1862 to meet the revenue demands of the Civil 12
War. The 1862 levy, like its predecessor, taxed legacies and distributive shares of personal
property but, unlike its predecessor, it was not a documentary stamp tax but an inheritance tax (a
tax imposed upon individuals who receive property from a decedent upon the privilege of 13
inheriting the property).
The amount of the 1862 tax was, as is typical of inheritance taxes, graduated according to the
closeness of the familial relationship between the decedent and the beneficiary. The rates ranged
from 0.75 percent, for distributions to ancestors, lineal descendants, and siblings, to 5 percent, for
distributions to distant relations and unrelated persons. The tax was imposed only on personal
estates in excess of $1,000. Bequests to surviving spouses were entirely exempt from tax. Gifts
intended to take effect at the donor’s death or thereafter were included in the donor’s estate for
War revenue needs prompted Congress to increase the rates of tax on inheritances in 1864 and to
impose a succession tax on the receipt of real property by devise. The succession tax applied both
to devises of real property and to transfers for inadequate consideration, though transfers in
consideration of marriage were regarded as transfers for adequate consideration. Widows (though
not widowers) were exempt from the succession tax, and charitable transfers of real estate were 14
expressly taxed at the highest rate.
In 1866, Congress responded to pleas of the Special Commissioner of the Revenue and tightened
enforcement of the legacy and succession taxes. A penalty of up to $1,000 was imposed on
executors and administrators who failed to furnish the required statements or filed false 15
The legacy and succession taxes were repealed in 1870, when the need for their additional 16
revenues had ceased. Four years later, the United States Supreme Court held, in Scholey v. 17
Rew, that the legacy and succession taxes had been constitutionally imposed.
11 During consideration of the 1862 tax, Representative William Payne Sheffield of Rhode Island argued unsuccessfully
for special treatment of charitable bequests. In debates on the floor of the House of Representatives, Congressman
It seems to me proper for the national Legislature to give encouragement to making of this class of
devises for charitable and literary purposes. There are a great many of them made—made to poor
churches and made for the purpose of building schools and colleges. The Government has
frequently aided such institutions by grants of land; and it seems to me to be in harmony with the th
previous policy of our legislature to adopt a provision of this character. Cong. Globe, 37 Cong., nd
2 Sess. 1534 (1862).
12 Act of July 1, 1862, 12 Stat. 432, 483.
13 An inheritance tax may be distinguished from an estate tax, such as the tax presently imposed by the federal
government. An estate tax is imposed upon a decedent’s estate for the privilege of passing the property to designated
beneficiaries, whereas an inheritance tax is imposed upon the beneficiaries themselves for the privilege of receiving
legacies, bequests and devises from the deceased.
14 Act of July 30, 1864, 13 Stat. 285, 480.
15 Act of July 13, 1866, 14 Stat. 140.
16 Act of July 15, 1870, 16 Stat. 256.
In Scholey, the taxpayer contended that the Civil War death taxes were direct taxes which, under 18
the United States Constitution, must be apportioned according to the census. The Court
disagreed, stating that:
Taxes on lands, houses, and other permanent real estate have always been deemed to be
direct taxes, and capitation taxes, by the express words of the Constitution, are within the
same category, but it never has been decided that any other legal exactions for the support of
the federal government fall within the condition that unless laid in proportion to the numbers
that the assessment is invalid.... Whether direct taxes in the sense of the Constitution
comprehends any other tax than a capitation tax and a tax on land is a question not absolutely
decided, nor is it necessary to determine it in the present case, as it is expressly decided that
the term does not include the tax on income, which cannot be distinguished in principle from 19
a succession tax such as the one in the present controversy.
The Income Tax Act of 1894 was not, in a technical sense, a death or gift tax, but it did treat gifts 20
and inheritances as income and tax them as such. The tax was short-lived, as the United States
Supreme Court ruled it unconstitutional in 1895, in Pollock v. Farmers’ Loan and Trust 21
Company. The Court found that, to the extent the 1894 income tax was imposed on the gains
from real estate, it so burdened the real estate as to constitute a direct tax, which had to be
apportioned among the states according to the census. The Court struck down the entire statute
because it found that elimination of only the tax on real estate income would unduly burden the
other classes of income taxpayers, contrary to congressional intent.
The War Revenue Act of 189822 imposed another death tax in order to raise revenues to finance
the Spanish-American War. The 1898 death tax was a form of estate tax, levied upon the value of
all personal property included in a decedent’s gross estate. Property passing to a surviving spouse
was excluded from the tax, and a $10,000 specific exemption excluded small estates. The tax
rates were graduated from 0.74 percent to 15 percent, taking into consideration both the size of
the estate and the degree of kinship of the decedent and the beneficiaries.
The United States Supreme Court upheld the 1898 estate tax in Knowlton v. Moore.23 The Court
reaffirmed its earlier decision in Scholey v. Rew, supra, and said that the estate tax, like the
inheritance tax, was an indirect tax subject to the rule of uniformity and not the rule of
17 23 Wall. (90 U.S.) 331 (1874).
18 U.S. Const., Art. I, § 9, cl. 4.
19 23 Wall. (90 U.S.) 331, 347.
20 Act of August 27, 1894, 28 Stat. 509, 553.
21 158 U.S. 429 (1895). This case is often correctly viewed as setting the stage for the passage of the Sixteenth
Amendment to the United States Constitution, which expressly authorizes the imposition of an income tax without
apportionment by census.
22 Act of June 4, 1898, 30 Stat. 448, 464.
23 178 U.S. 41 (1900).
apportionment. The Court rejected the contention that death taxes were the exclusive prerogative
of the states and held that, although wills and distribution of estates were matters for state law,
taxation of these transfers could rest with the federal government as well as the states.
The 1898 estates tax was amended in 1901 to exempt bequests to charitable, religious, literary
and educational organizations and to organizations for the encouragement of the arts or the 2425
prevention of cruelty to children. In 1902, the estate tax was repealed.
Federal death taxes in the United States between 1797 and 1915 appear to have served as
supplementary revenue sources adopted only during war times. There is little support for the
theory that these taxes were levied in an attempt to prevent the transfer of vast estates or to
Attitudes began to change with respect to the perpetuation of large estates, however, and in a
speech in 1906 President Theodore Roosevelt called for:
a progressive tax on all fortunes beyond a certain amount, either given in life or devised or
bequested upon death to any individual—a tax so framed as to put it out of the power of the
owner of one of these enormous fortunes to hand on more than a certain amount to any one 26
A history of the modern federal estate and gift taxes must begin in 1916. Though since
extensively reexamined and revised numerous times, legislation enacted that year is the direct
ancestor of current law.
In 1916, Congress reacted to a mixture of changing attitudes and revenue shortages, the latter
caused by a reduction in United States trade tariff receipts in the early years of World War I. It
became apparent that greater reliance would have to be placed on internal taxes and that
dependence on tariffs would have to be reduced. One internal tax was a federal estate tax.
The estate tax adopted in the Revenue Act of 191627 had many features of the current taxes. It was
measured by the value of the property owned by a decedent at the date of death and the value of a
decedent’s estate was increased for tax purposes by certain lifetime transfers, including transfers
24 Act of March 2, 1901, 31 Stat. 946.
25 Act of April 12, 1902, 32 Stat. 96.
26 See, quotation in Randolph E. Paul, Taxation in the United States p. 88 (Boston, 1954).
27 Act of September 8, 1916, 39 Stat. 756; on rationale for the tax as a revenue measure, see, H.Rept. 64-922, 64th
Cong., 1st Sess. 1-5 (1916).
for inadequate consideration, transfers not intended to take effect until death, and transfers in 28
contemplation of death. The full value of property owned concurrently by a decedent and
another person would be included in the decedent’s gross estate, unless it could be established
that the surviving joint owner had contributed part of the property’s acquisition cost.
The 1916 estate tax allowed the executor to reduce a decedent’s estate for tax purposes by a
$50,000 exemption and the amount of any funeral expenses, administration expenses, debts,
losses, and claims against the estate. The tax rates ranged from 1 percent on net estates of up to
$50,000, to 10 percent on net estates over $5,000,000.
The Supreme Court upheld the 1916 estate tax in New York Trust Company v. Eisner.29 Writing
for the Court, Justice Oliver Wendell Holmes stated:
The statement of the constitutional objections urged imports on its face a distinction that,
if correct, evidently hitherto has escaped this Court. See, United States v. Field, 255 U.S.
257. It is admitted, as since Knowlton v. Moore, 178 U.S. 41, it has to be, that the United
States has power to tax legacies, but it is said that this tax is cast upon a transfer while it is
being effectuated by the State itself and therefore, is an intrusion upon its processes, whereas
a legacy tax is not imposed until the process is complete. An analogy is sought in the
difference between the attempt of a State to tax commerce among the States and its right
after the goods have become mingled with the general stock in the State. A consideration of
the parallel is enough to detect the fallacy. A tax that was directed solely against goods
imported into the State and that was determined by the fact of importation would be no better
after the goods were at rest in the State than before. It would be as much an interference with
commerce in one case as in the other . . . . Conversely, if a tax on the property distributed by
the laws of a State, determined by the fact that distribution has been accomplished, is valid, a
tax determined by the fact that distribution is about to begin is no greater interference and is 30
The revenue demands of defense preparations prompted increases of one-half in the estate tax 31
rates, as part of the Revenue Act of 1917. Later in that same year, two new rate brackets were 32
added at the upper end of the rate scale. By the end of 1917, the estate tax rates progressed from
2 percent on net estates below $50,000, to 22 percent on net estates between $8,000,000 and
$10,000,000, and 25 percent on net estates above $10,000,000. Estates of individuals whose death
resulted from military service were not taxed.
28 A gift was presumed to have been made in contemplation of death if it was made within two years of death. The
executor could rebut this presumption by showing that the gift was motivated by lifetime considerations, rather than
death tax avoidance.
29 256 U.S. 345 (1920).
30 256 U.S. at 348.
31 Act of March 3, 1917, 39 Stat. 1000; for statements regarding its necessity to provide war revenues, see, H.Rept. 64-
1366, 64th Cong., 2nd Sess. 1-3 (1917).
32 Act of October 3, 1917, 40 Stat. 300.
The conclusion of World War I prompted debates over the continued existence of the estate tax. 33
The House of Representatives approved a rate in 1918 but the Senate sought instead to replace 34
the estate tax with an inheritance tax. The Revenue Act of 1918 reflected a compromise between
the views of the House and Senate, retaining the estate tax but cutting the rates on estates of less
The 1918 law also expanded the estate tax base by including the value of a surviving spouse’s
dower or curtesy right in the decedent’s estate and the proceeds, over $40,000, of life insurance
policies on the decedent’s life, if they were receivable by the executor or the estate. The 1918 Act
also included in the gross estate the value of any property subject to a general power of
appointment held by the decedent, whether exercised in the decedent’s will or exercised during 35
the decedent’s life in contemplation of death. Charitable contributions were deductible in
computing the taxable estate.
The estate tax remained unchanged until 1924, when Congress again increased the estate tax rates
to a top rate of 40 percent on net estates over $10,000,000; made certain adjustments to the estate 36
tax base; and added a gift tax. The estate tax base was increased by adding the value of property
which a decedent transferred during life but over which the decedent retained the power to “alter,
amend, or revoke” the beneficial enjoyment. Provision was also made for allocating to the estate
a portion of the value of concurrently owned property acquired by a decedent and a surviving
joint owner by gift or inheritance, in which case there would be no relative contributions. Also, a
credit against the federal estate tax was allowed for state death taxes, up to a total of 25 percent of
the federal tax liability.
The Revenue Act of 1924 also added a gift tax with the same rate schedule as the estate tax. A
lifetime exclusion of $50,000 and an annual exclusion of $500 per donee were both allowed.
Neither charitable contributions nor gifts of property which the donor had received by gift or
inheritance within the past five years were subject to gift tax.
Stiff opposition to the estate and gift taxes increased during the mid-1920s, and in 1926 the gift 37
tax and many of the estate tax rate increases were repealed. The 1926 Act created an estate tax
rate range from 1 percent on net estates under $50,000, to 20 percent on net estates above
$10,000,000. The estate tax exemption was increased from $50,000 to $100,000, and the
maximum credit for state death taxes was increased from 25 percent to 80 percent of the federal
estate tax liability.
33 See, H.Rept. 65-767, 65th Cong., 2nd Sess. (1918); and the debates on H.R. 12863, 65th Cong., 2nd Sess., 56 Cong.
34 Act of February 24, 1919, 40 Stat. 1057.
35 A power of appointment is a right held by someone other than the owner of property, to designate the person or
persons who will enjoy the benefits of the property. For example, a power to designate who will receive the income
from certain stocks would be a general power of appointment over the income from stocks. The power to designate
who would receive the stocks at the owner’s death would be a general power of appointment over the stocks
36 Revenue Act of 1924, Act of June 2, 1924, 43 Stat. 253.
37 Revenue Act of 1926, Act of February 26, 1926, 44 Stat. 9; on the necessity of the estate tax rate increases to provide
revenues to finance new Federal projects, see, H.Rept. 72-708, 72nd Cong., 1st Sess. 1-4 (1932).
Although the 1924 gift tax was repealed by the Revenue Act of 1926, it did stimulate a decision 38
of the United States Supreme Court upholding its constitutionality. In Bromley v. McCaughn, the
Court held that the gift tax was an excise tax of the constitutional class of indirect taxes, requiring
only intrinsic uniformity, rather than apportionment.
The depression of the 1930s reduced income tax revenues and increased the demand for revenues
to finance various new Government projects. Again, Congress turned to the estate and gift taxes.
The Revenue Act of 193239 increased the estate tax rates at virtually every level, added two new
rate brackets, and reduced the estate tax exemption to its 1924 level of $50,000. The resultant
estate tax had rates graduated from 1 percent on net estates up to $100,000, to 45 percent on net
estates above $10,000,000.
The 1932 Act also reintroduced a federal gift tax, but with rates set at three-quarters of the estate
tax rates, a level maintained until 1976. The lifetime gift tax exclusion was set at $50,000, and the
annual exclusion at $5,000 per donee. No tax was imposed on charitable gifts.
The gift tax was, and continues to be, cumulative. That is, the rate of tax on each successive
taxable gift over the donor’s lifetime is computed on the basis of the total amount of all such
gifts. If two donors each made identical gifts of $50,000 in a specific year, the donor with the
greater amount of lifetime taxable gifts (after 1932) would pay the higher tax on the present
Between 1934 and 1942, social policies and wartime demands led to a series of estate and gift tax
rate increases, though the gift tax rates continued to be maintained at three-quarters of the estate
tax rates. The Revenue Act of 1934 raised the maximum estate tax rate to 60 percent, on a net 40
estate over $10,000,000, and the Revenue Act of 1935 further raised it to 70 percent, on net 41
estates over $50,000,000. The 1935 Act also reduced the estate and gift tax lifetime exemptions
to $40,000 each.
The outbreak of World War II in Europe raised congressional concern over the state of American
military preparedness and prompted an increase in the estate and gift taxes to provide additional
revenue. The Revenue Act of 1940 added a 10 percent surtax to the income, estate, and gift 42
taxes. The Revenue Act of 1941 increased the estate and gift tax rates even further, producing an
estate tax rate graduation from 3 percent, on net estates not over $5,000, to 77 percent, on net 43
estates over $50,000,000. The gift tax rates were maintained at three-quarters of the estate tax
38 280 U.S. 124 (1929).
39 Act of June 6, 1932, 47 Stat. 169.
40 Act of May 10, 1934, 48 Stat. 680.
41 Act of August 30, 1935, 49 Stat. 1014.
42 Act of June 25, 1940, 54 Stat. 516; on the reason for the increased rates, see, H.Rept. 76-2491, 76th Cong., 3rd Sess. 1
43 Act of September 20, 1941, 55 Stat. 687.
The basic estate and gift tax exemptions were altered again by the Revenue Act of 1942,44 which
created a $60,000 estate tax exemption, a $30,000 lifetime gift tax exclusion, and a $3,000 annual
per donee gift tax exclusion. The 1942 Act also increased the estate tax base by including in a
decedent’s gross estate the proceeds of any life insurance policy on the decedent’s life if either the
proceeds were payable to or for the benefit of the estate or the decedent had paid the premiums on
The 1942 Act also attempted to correct the perceived inequity in estate and gift taxation between 45
residents of community property states and non-community property states. Property owned
concurrently by a decedent and a surviving spouse in a non-community property state was
excluded from the decedent’s gross estate only to the extent it could be shown that the surviving
spouse contributed to the acquisition cost. In a community property state, however, one-half of all
property acquired by either spouse during their marriage belonged to each spouse, by operation of
law. On the death of either spouse, only one-half of the community property would be subject to 46
estate taxes. This resulted in the automatic equalization of the estates of spouses residing in
community property states and a lower total estate tax burden.
Congress attempted to resolve this problem by treating community property like it treated
concurrently owned property in a non-community property state. Community property was
included in a decedent’s gross estate except to the extent that the surviving spouse could be
shown to have contributed to the acquisition cost.
This solution, deemed complex and unsuccessful, was replaced in the Revenue Act of 194847 by
the estate and gift tax marital deductions and the rules on split-gifts. The estate tax marital
deduction permitted a decedent’s estate to deduct the value of all property passing to a surviving
spouse, whether passing under the will or otherwise. Under the 1948 Act, the maximum
deduction was one-half of the decedent’s adjusted gross estate (the gross estate less debts, taxes
and administration expenses). Community property, however, was ineligible for the estate tax
marital deduction, thereby equalizing the tax treatment of estates of residents of community
property states and non-community property states.
The gift tax marital deduction allowed a donor to deduct one-half of an interspousal gift, other
than community property, to a third person. Concomitantly, the split gift rule allowed the non-
donor spouse to elect to be treated as having made a gift of one-half the total transfer. This
election was to be made on the gift tax return, and use of two annual exclusions on gifts by a
spouse to a third person was permitted.
44 Act of October 21, 1942, 56 Stat. 798.
45 Under community property laws, the property acquired by either spouse during their marriage belongs half to each
46 See Estate of Eisner v. Comm’r, B.T.A. Memo. Op. (October 31, 1939); and Hernandez v. Becker, 54 F.2d 542 (10th
47 Act of April 2, 1948, 62 Stat. 110.
The estate taxation of life insurance proceeds was changed during the recodification of the tax
laws in 1954. The Internal Revenue Code of 1954 includes the proceeds of a life insurance policy
on the decedent’s life in the gross estate if the proceeds were payable to, or for the benefit of, the
estate, if the decedent retained any incidents of ownership in the policy on the date of death, or if
the decedent gave away any of the incidents of ownership in the policy within three years of 48
death and in contemplation of death.
Starting in 1976, Congress enacted major revisions to the federal transfer tax system. The estate
and gift tax laws were significantly altered. A new tax on generation-skipping transfers was 49
added. The greatest structural change was the unification of the estate and gift taxes.
The Tax Reform Act of 197650 created a unified estate and gift tax framework, consisting of a
single graduated rate of tax imposed on both lifetime gifts and testamentary dispositions. The gift
tax remained cumulative, so that the rate of tax on each successive taxable gift was higher
throughout the donor’s entire lifetime. Transfers made at death are treated as the last taxable gift
of the deceased donor. Therefore, the amount of lifetime taxable gifts affects the rate of tax
imposed on the donor’s taxable estate, though it does not affect the actual size of the taxable
estate. The estate and gift tax rates were graduated to a maximum tax rate of 70 percent on 51
cumulative gifts or taxable estates of more than $5,000,000.
The Tax Reform Act of 1976 also merged the estate tax exclusion and the lifetime gift tax 52
exclusion into a single, unified estate and gift tax credit, which may be used to offset gift tax
liability during the donor’s lifetime but which, if unused at death, is available to offset the
deceased donor’s estate tax liability. The credit was $42,500 for transfers made in 1980 and
$47,000 for transfers made after 1980. This was equivalent to an estate and gift tax exemption of 53
$161,000 for transfers made during 1980 and $175,625 for transfers made after 1980. The
$3,000 per donee annual gift tax exclusion was retained unchanged.
48 26 U.S.C. § 2042. An “incident of ownership” is any economic benefit from the policy, such as the right to change
the beneficiary, to borrow against the cash surrender value, or to cancel the policy.
49 P.L. 94-455 §§ 2001-2009; See also, Staff on the Joint Committee on Taxation, 94th Cong., 2nd Sess., General
Explanation of the Tax Reform Act of 1976, 525-597 (1976).
50 P.L. 94-455, 94th Cong., 2nd Sess. (1976).
51 P.L. 94-455 § 2001.
52 P.L. 94-455 § 2001.
53 The credit was a dollar-for-dollar offset against tax, rather than a deduction from the amount of taxable gifts or
taxable estate. Therefore, the $47,000 credit was equivalent to an exemption of $175,625 because it would cover the
gift or estate tax on a transfer of $175,625.
The Tax Reform Act of 1976 also changed the income tax consequences of a sale of property
received from a decedent. The gain on a sale is the difference between the amount realized by the
seller and the seller’s basis. An heir’s basis in inherited property, prior to the 1976 Act, was its fair
market value for federal estate tax purposes. Therefore, if inherited property were sold soon after
the date of death, there would be no gain and no income tax liability. The appreciation accruing
prior to the date of death would be forever eliminated from the income tax base. The 1976 Act
provided a rule under which the basis of property received from a decedent was “carried over”
from the decedent. This so-called “carryover basis” rule gave heirs a basis in inherited property
equal to the decedent’s basis on the date of death, with adjustments for a share of the appreciation
accruing before 1977, a share of the estate taxes paid on the property, and a share of the state
death taxes imposed on the property. The heir could also increase the basis in all of the decedent’s 54
property to a minimum basis of $60,000.
The 1976 Act also increased the limitation on the estate tax marital deductions for moderate-sized
estates, allowing the deduction for the greater of one-half of the adjusted gross estate (the former 55
limitation) or $250,000. In conjunction with the unified transfer tax credit, the increased estate
tax marital deduction permitted the tax-free passage of an estate of up to $425,625 in 1981, if at
least $250,000 passed to the surviving spouse.
The limitation on the gift tax marital deduction was also increased in certain cases, allowing a
donor spouse to deduct the full amount of the first $100,000 of lifetime interspousal taxable gifts
after 1976, but allowing no deduction on the next $100,000 of interspousal taxable gifts. A 56
deduction was allowed for one-half of the value of all subsequent interspousal taxable gifts.
The inclusion of property transferred by gift in contemplation of death was also revised by the
1976 Act, eliminating the rebuttable presumption that all gifts made within three years of death
were made in contemplation of death. Now, the 1976 Act required automatic inclusion in the
gross estate of the value of all gifts made within three years of death, unless they were less than 57
The 1976 Act also provided a method by which spouses could assure the exclusion of one-half of
the value of concurrently owned property by electing to treat the creation of the joint interest as a 58
taxable gift. Previously, a gift to a spouse of one-half of the value of concurrently owned
property did not remove any portion of the value of the property from the donor’s gross estate, if
the donor predeceased. Under the “fractional interest” rule, however, if the creation of the
concurrently owned property was a taxable gift, and if certain other requirements were met, the
estate of the first spouse to die included only one-half of the value of the concurrently owned
property. Therefore, the executor did not have to establish relative contributions of the deceased
and the surviving spouse.
54 P.L. 94-455 § 2005. This rule never went into effect. Its effective date was suspended and later the rule was repealed
retroactively to its date of enactment. See, discussion of the Revenue Act of 1978 and the Crude Oil Windfall Profits
Tax Act of 1980, infra.
55 P.L. 94-455 § 2002.
56 To further integrate the estate and gift taxes there was an offset in the estate tax marital deduction for gifts which
qualify for more than a one-half gift tax marital deduction. To the extent that a decedent’s life time taxable interspousal
gifts were less than $250,000, the estate tax maximum marital deduction was reduced by the difference between the
actual gift tax marital deduction on these transfers and one-half of the value of the gifts. P.L. 94-455 § 2002(a) and (b).
57 P.L. 94-455 § 2001(a)(5).
58 P.L. 94-455 § 2002(C).
The 1976 Act provided special rules for estates composed principally of interests in a closely held
business or family farm. If the business (or farm) interest was a sufficiently large share of the
estate, and if it satisfied certain other requirements, any real estate used in the farm or business 59
will be valued at its present use, rather than its “highest and best use.” This provision could
reduce the size of the decedent’s gross estate by up to $500,000, but any estate tax savings were
recaptured if the business or farm was not continued by the decedent’s family for the next 15
The 1976 Act also permitted estates composed primarily of an interest in a closely-held business 60
or family farm to defer payment of the estate taxes attributable to the business interest. If certain
rules were met regarding the size of the business interest in proportion to the estate, no portion of
the estate taxes attributable to the business interest would have to be paid for the first five years,
with only interest required. The estate taxes on this share of the estate were allowed to be paid in
up to ten equal annual installments thereafter.
The 1976 Act also created an estate tax deduction for certain bequests to minor children of the
decedent if the children had no other living parents after the decedent’s death. This “orphan’s 61
deduction” was limited to $5,000 for each year each child is under 21 years of age.
One of the major changes in the 1976 Act was the adoption of a new tax on certain generation-
skipping transfers. A generation-skipping transfer was defined as one which split the enjoyment
and ownership of property between two individuals. The first level of beneficiaries, usually the
donor’s children, received the right to use and benefit from property during their lifetime. The
second level of beneficiaries, usually the settlor’s grandchildren, received the out-right ownership
of the property at the termination of the interests of the first level of beneficiaries. Prior to the
1976 Act, the character of the interests held by the different beneficiaries had resulted in estate or
gift taxation of the property to the donor and the ultimate, second level of beneficiaries, but not
the intervening, first level of beneficiaries. The Tax Reform Act of 1976 added a complex series
of rules designed to treat the termination of the interest of the intervening beneficiaries as a
taxable event, taxed at a rate equal to the estate and gift tax rates which would have been
applicable had the property been transferred outright by the donor and then by the first 62
The Revenue Act of 197863 made a number of technical changes in the estate and gift tax rules
added in 1976, and two substantive changes. First, it suspended the effective date of the carryover
basis rules until 1980. Second, it provided a set of rules by which a surviving spouse who
“materially participated” in the operation of a family firm or closely held business owned
concurrently with a deceased spouse, could treat a portion of appreciation in the value of the
business that accrued during the period of such participation, as cash consideration contributed by
59 P.L. 94-555, §2003(a).
60 P.L. 94-455, § 2004(a).
61 P.L. 94-455 § 2007.
62 P.L. 94-455 § 2006. This tax never went into effect. Its effective date was suspended, and later it was repealed
retroactively to its date of enactment and replaced with a new tax. See, P.L. 99-514, §§ 1431-1433.
63 P.L. 95-600, 95th Cong., 2d Sess. (1978).
that surviving spouse. Therefore, a share of the value of the concurrently owned business assets
would not be taxable in the estate of the deceased spouse because it would be treated as having 64
come from the surviving spouse’s contributions.
The Crude Oil Windfall Profits Tax Act of 198065 is, perhaps, an odd vehicle for an important
death tax provision. However, it was as an amendment to this bill that the carryover basis rules of 66
the Tax Reform Act of 1976 were repealed, retroactive to the effective date of the 1976 Act.
The Economic Recovery Act of 1981 (ERTA)67 made substantial changes in the estate tax
apparently designed to reduce the number of taxable estates and to prevent the imposition of an
estate or gift tax on interspousal transfers. With only minor exceptions, these changes applied to
estates of decedents dying after December 31, 1981, and to gifts made after December 31, 1981.
ERTA increased the unified transfer tax credit from $47,000 to $192,800, phased-in over six
years, effectively increasing the exemption equivalent from $175,625 to $600,000 over that 68
period. Also phased-in over a three year period was a reduction, from 70 percent to 50 percent,
in the top estate, gift, and generation-skipping transfer tax rates applicable to transfers above 69
ERTA made substantial changes in the marital deduction. The quantitative limits on the estate and
gift tax marital deductions were eliminated, thereby allowing unlimited interspousal tax-free
transfers after December 31, 1981. The marital deduction was permitted for transfers of certain
lifetime income interests in trust or otherwise, if the donor or executor elects to include the full
value of the transferred property in the estate of the donee or surviving spouse. Transfers of
64 P.L. 95-600, § 511(a).
65 P.L. 96-223, 96th Cong., 2d Sess. (1980).
66 Executors could elect to use the carryover basis rules on certain estates of decedents who died after December 31,
1976, and before November 7, 1980.
67 P.L. 97-34, 97th Cong., 1st Sess. (1981); see also, H.Rept. 97-201, 97th Cong., 1st Sess. 154-196 (1981); S.Rept. 97-
144, 97th Cong., 1st Sess. 124-142 (1981); and H.Rept. 97-215, 97th Cong., 1st Sess. 247-257 (1981).
68 P.L. 97-34, § 401. The credit was phased-in as follows:
Year Credit Exemption Equivalent
1981 $47,000 $175,625
1982 $62,800 $225,000
1983 $79,300 $275,000
1984 $96,300 $325,000
1985 $121,800 $400,000
1986 $155,800 $500,000
1987+ $192,800 $600,000
P.L. 97-34, § 402.
income interests in charitable remainder trusts after December 31, 1981, were allowed to qualify 70
for the marital deduction.
A new rule was enacted regarding the estate taxation of property owned jointly by spouses with a
right of survivorship. This rule required including in the gross estate of a decedent dying after
December 31, 1981, only one-half of the value of property owned jointly with a right of
survivorship by the decedent and the surviving spouse and no other persons, regardless of the
relative contributions of the decedent and the surviving spouse. The 1981 Act also repeals the
special rules that formerly applied with respect to elective fractional interests of a husband and 71
wife in a jointly owned property and to jointly owned farm or business property.
ERTA liberalized and simplified the rules by which an estate qualifies to have family farm or
closely held business real estate valued at its present use, rather than its highest and best use.
Included was a special rule to enable individuals more easily to retire on Social Security without
losing the ability to specially value their farm or business real estate. The “material participation”
standard was reduced in certain cases, and the amount by which a decedent’s gross estate can be
reduced by special use valuation was increased from $500,000 to $750,000. These rules apply 72
generally with respect to estates of decedents dying after December 31, 1981.
ERTA also liberalized and simplified the rules by which the estate taxes attributable to an interest
in a closely held business can be paid in installments over a 15-year period. A special 4 percent
interest rate on the deferred tax attributable to the first $1,000,000 in value was provided, with 73
respect to estates of decedents dying after December 31, 1981. The new law also eliminates the
former 10-year installment payment rule.
After 1981, the rule by which property given away within three years of the date of death is
automatically included in the gross estate of the donor was eliminated for most types of gifts. The
automatic inclusion rule was retained in certain special instances, such as gifts of life insurance 74
ERTA increased the annual gift tax per donee exclusion from $3,000 to $10,000, with respect to
taxable gifts after December 31, 1981. The act also permitted an unlimited annual exclusion for 75
the payment of a donee’s tuition or medical expenses.
Only an annual gift tax return was required to be filed after 1981. The filing date for this return 76
was set on the same date as the donor’s income tax return, including time for extensions.
A qualified disclaimer for estate and gift tax purposes was permitted even if the disclaimer was
invalid under applicable State law, if the disclaimant actually transferred the property to the 77
person who would have taken it if the disclaimer had been valid.
70 P.L. 97-34, § 403.
71 P.L. 97-34, § 403(c).
72 P.L. 97-34, § 421.
73 P.L. 97-34, § 422.
74 P.L. 97-34, § 424(a).
75 P.L. 97-34, § 441.
76 P.L. 97-34, § 401(a)(2)(B).
77 P.L. 97-34, § 426(a).
ERTA repealed the orphan’s deduction allowed first under the Tax Reform Act of 1976.78 It also
delayed for an additional year the effective date of the generation skipping transfer tax rules with 79
regard to transfers under wills and revocable trusts in existence on June 11, 1976.
The Deficit Reduction Act of 1984 (DFRA)80 contained a number of changes involving gift and 81
estate taxes, though the essential thrust of the Economic Recovery Tax Act was unaffected.
DFRA froze the maximum gift and estate tax rate at 1984 levels (55 percent) until 1988. Under 82
ERTA the top rate was scheduled to fall to the 50 percent level in 1985.
DFRA modified the gift and estate tax law to liberalize provisions for gift tax free transfers to
former spouses pursuant to a written agreement. It increased to three years, two years before and
one year after a divorce, the period for making an agreement for such transfers. It also allowed an 83
estate tax deduction for such transfers.
DFRA made three changes that affected estates containing closely held businesses. First, it
modified the installment payment provisions applicable to a closely held business interest to
permit their use in a modified form where non-readily tradeable stock is indirectly owned. This
was accomplished by permitting a look through a passive holding company to determine if the
decedent owned 20 percent or more of the voting stock and the value of such closely held 84
business interest exceeded 35 percent of the adjusted value of the estate. Second, the alternate
valuation rules were amended to permit an election on late returns, those filed within one year of
the due date, and to prevent use of alternate valuation except where it resulted in a decrease in 85
both the total value of the estate and estate taxes. Third, a provision to permit perfection of a
current use valuation election notice or agreement, where there was substantial compliance with 86
IRS regulations in the original notice or agreement, was enacted.
In DFRA, Congress, for the first time, adopted statutory provisions governing gift loans (certain
below market interest rate loans) which treat foregone interest as a gift. An exception was
provided where loans do not exceed $100,000. The act also provided for income tax treatment of 87
the imputed interest.
78 P.L. 97-34, § 427(a).
79 P.L. 97-34 § 428.
80 P.L. 98-369, 98th Cong., 2nd Sess. (1984); see also, H.Rept. 98-432, part II, 98th Cong., 2nd Sess. 1504-1522 (1984);
S.Rept. 98-169, 98th Cong., 2nd Sess. 711-725 (1984); and H.Rept. 98-861, 98th Cong., 2nd Sess. 774, 1120, and 1235-
81 P.L. 97-448 § 104, 97th Cong., 2nd Sess. (1982), Technical Corrections Act of 1982, included several provisions to
clarify the 1981 ERTA Gift and Estate Tax provisions.
82 P.L. 98-369 § 21.
83 P.L. 98-369 § 425.
84 P.L. 98-369 § 1021. Where the stock is indirectly owned and the quantitative requirements are met, an installment
payment election may be made, but the 4 percent interest rate and five-year deferral of principal payments of certain
amounts of deferred tax payments, available for directly owned interests, are not applicable.
85 P.L. 98-369 §§ 1023, 1024.
86 P.L. 98-369 § 1025.
87 P.L. 98-369 § 172.
DFRA also provided for the addition of permanent rules for permitting reformation of a
charitable, split-interest trust, to comply with the 1969 Tax Reform Act requirements for income,
estate, or gift tax deductibility as a charitable contribution (Congress had in the past enacted 88
temporary provisions permitting reformation); elimination of the $100,000 estate tax exclusion
for certain retirement benefits payable at death from individual retirement accounts, qualified 89
plans, military retirement, and tax sheltered annuities; and clarification of congressional intent
to apply transfer taxes (gift, estate, and generation-skipping) to certain bonds exempt from 90
income tax by virtue of law outside the Internal Revenue Code.
The Tax Reform Act of 198691 contained four generally applicable changes to the estate, gift, and
generation-skipping taxes. The most extensive of these changes was the repeal of the existing
generation-skipping transfer tax retroactive to June 11, 1976, and enactment of a new system to 92
tax such transfers. This new tax replaced the graduated tax, based on the estate tax rates, with a
flat rate tax set at the highest estate tax rate, currently 55 percent. The tax was applicable to all
generation-skipping transfers, including transfers which directly skipped a generation without the 93
intervening generation enjoying any beneficial interest in the transferred property.
The Tax Reform Act also included a 50 percent exclusion from estate taxation of qualified 94
proceeds from qualified sales of employer securities to an employee stock option plan;
modification of the definition of the qualified conservation contribution rules to allow a deduction
without regard to whether contributions met the “conservation purpose” requirement of the 95
income tax; and repeal of the gift tax exclusion for an employee’s exercise or non-exercise of an
election under which an annuity, pension from a qualified plan, tax-deferred annuity, IRA, or 96
military pension would be paid to a beneficiary after the employee’s death.
The Omnibus Budget Reconciliation Act of 1987 (OBRA)97 contained four amendments to the
estate, gift and generation-skipping taxes. The first of these amendments froze the generation-
skipping tax rate and the top gift and estate tax rates at 55 percent, delaying the drop to a 50 98
percent rate until after December 31, 1992.
88 P.L. 98-369 § 1022.
89 P.L. 98-369 § 525.
90 P.L. 98-369 § 641.
91 P.L. 99-514, 99th Cong., 2nd Sess. (1986). See also, H.R. Rep. 841, 99th Cong., 2nd Sess. 770-776 (1986).
92 P.L. 99-514 §§ 1431-1433.
93 These “direct skips” were not taxed under the 1976 generation-skipping transfer tax.
94 P.L. 99-514 § 1172.
95 P.L. 99-514 § 1422.
96 P.L. 99-514 § 1852(e). This section also makes technical corrections to 26 U.S.C. § 2039 by repealing subsection (c).
97 P.L. 100-203, 100th Cong., 1st Sess. (1987). See also, H.Rept. 100-495, 100th Cong., 1st Sess. 992-998 (1987).
98 P.L. 100-203, § 10401(a).
OBRA provided for a phase-out of the unified credit for estate and gift transfers exceeding
$10,000,000. This phase-out is accomplished by adding a 5 percent tax to the tax on taxable
transfers over this amount until the benefit of the unified credit has been recaptured. Thus
between 1988 and the end of 1992, transfers between $10,000,000 and $21,040,000 would be
taxed at 60 percent. Once the recapture is complete, 55 percent would again become the tax rate.
After 1992, when the top rate was scheduled to drop to 50 percent, the recapture was to apply to 99
transfers between $10,000,000 and $18,340,000. This provision did not affect the tax rate for 100
computing the generation-skipping transfer tax.
OBRA closed a perceived loop hole which had been created by the provision of the Tax Reform
Act of 1986 which established the estate tax deduction for sales of employer securities to an
ESOP. This provision had left open the possibility that an estate could, through a series of
purchases and sales to an ESOP, totally wipe out its estate tax liability. The act clarifies and
restricts the availability of this deduction by limiting the deduction to sales of nonpublicly traded
securities; limiting the deduction to 50 percent of the taxable estate; limiting the maximum
reduction in estate taxes to $750,000; imposing holding requirements on the decedent and the
ESOP; prohibiting the deduction in the case of securities acquired with assets transferred from
another plan of the employer; and imposing an excise tax on the ESOP for failure to satisfy the 101
allocation and holding period requirements.
Finally, OBRA provided that “valuation” or “estate freeze” transactions will cause the total value
of the property transferred in the transaction to be included in the decedent’s gross estate as 102
property in which the decedent had a retained interest.
The Technical and Miscellaneous Revenue Act of 1988 (TAMRA)103 contained a number of
amendments to the estate, gift, and generation-skipping taxes. Many of these, as the name of the
act implies, were technical in nature. Among these were a number of clarifying amendments to
the generation-skipping transfer tax, which affected such areas as the overlapping definitions of
99 This drop in rates was retroactively repealed by P.L. 103-66, § 13208, 103rd Cong., 1st Sess. (1993).
100 P.L. 100-203, § 10401(b).
101 P.L. 100-203, § 10411-10413. The retroactive effect of this provision was upheld by the Supreme Court in U.S. v.
Carlton, 114 S.Ct. 2018 (1994).
102 P.L. 100-203, § 10402. In general, a freeze transaction involves the division of ownership of a business into two
parts, a growth interest and an interest in the current value of the business, which is the interest which is frozen. By
selling, at a nominal price, or giving away the growth interest, a taxpayer could maintain control of the business and
continue to enjoy the income from the business while excluding any future appreciation in its value from his gross
estate. The classic freeze transaction is a recapitalization of a closely held business. The transferor exchanges his
common stock for voting preferred stock, which represents the current value of the business entity. New common stock
is given to the transferor’s children. This stock, at the time of the gift, has practically no value, but as the value of the
business appreciates, the appreciation in value is represented in this common stock. If not for this provision, this
transaction would “freeze” the transferor’s interest in the business at the value it had at the time of the transaction and
any appreciation value would pass to his children free of estate taxation because it had been given away. This estate tax
benefit is eliminated by treating a retained frozen interest as the equivalent of a retained life estate in the gifted growth
This provision was repealed retroactively to the date of its enactment by the Omnibus Reconciliation Act of 1990, P.L.
101-508, § 11601, supra.
103 P.L. 100-647, 100th Cong., 2nd Sess. (1988).
“direct skips,” “taxable terminations,” and “taxable distributions”; the inclusion ratio for
charitable lead trusts and nontaxable gifts; generation assignment; taxation rules for multiple 104
skips; and the grandchild exemption.
TAMRA made several changes expanding and clarifying the situations to which the estate freeze 105
rules apply. The act also removed the marital deduction for both the estate and the gift tax when
a spouse is not a citizen of the United States unless the transfer is made utilizing a “qualified 106
TAMRA amended the alternate valuation rules for family farms. Under the amendment, a
surviving spouse may rent the farm to a family member on a net cash basis without incurring
recapture liability. The amendment applied to rentals occurring after December 31, 1976. The
statute of limitations for refunds for closed years was waived for claims made within one year of 107
Under prior law, art loaned to a tax-exempt organization was a transfer taxable under the gift tax.
Such a transfer did not qualify for the gift tax charitable deduction because only a partial interest
was transferred. TAMRA allowed such loans to qualify for the charitable deduction if the 108
charities use of the art is related to the organizations tax-exempt purpose.
The Revenue Reconciliation Act of 1989 (RRA)109 contained a small number of amendments to 110
the transfer taxes. The amendments to the generation-skipping tax were of a technical nature.
The gift tax was amended to allow the $100,000 exclusion for transfers to a noncitizen spouse
only if the transfer would qualify for the marital deduction if the spouse were a citizen of the 111
The estate tax changes in RRA modified the new rules enacted in TAMRA concerning transfers to
a spouse who is not a citizen of the United States. Under TAMRA the estate tax marital deduction
had been eliminated for transfers to a noncitizen spouse unless a qualified domestic trust was
utilized. The RRA allowed the use of the marital deduction for transfers to a resident spouse if the 112
spouse became a citizen before the filing estate tax return.
The RRA also modified the requirements of a qualified domestic trust. As modified, a qualified
domestic trust needed only to have one trustee who is a citizen of the United States as opposed to
the previous requirement that all trustees be citizens. The lone citizen trustee was required to have
veto power over the distributions from the trust. Under the RRA, the noncitizen spouse no longer
104 P.L. 100-647, § 1014.
105 P.L. 100-647, § 3031.
106 P.L. 100-647, § 5033.
107 P.L. 100-647, § 6151.
108 P.L. 100-647, § 1018.
109 P.L. 101-239, 101st Cong., 1st Sess. (1989).
110 See, P.L. 101-239, § 7811.
111 P.L. 101-239, § 7815(d)(1).
112 P.L. 101-239, § 7515(d)(5).
needed an income interest in the trust for the trust to be qualified, unless the trust was a 113
The RRA went a long way toward taxing qualified domestic trusts in the same manner as the
estates of citizen spouses by permitting certain estate tax benefits against the estate tax required
of a qualified domestic trust upon the death of the noncitizen spouse. These benefits included
alternate valuation, charitable deductions, special use valuation, and certain capital gains 114
The RRA provided that the denial of the marital deduction to a noncitizen spouse will not be
effective, during a three-year period from the effective date of the RRA, against a noncitizen
spouse who is domiciled in a country which has a treaty with the United States which would 115
provide a different result. The RRA set rules and time tables for reforming trusts to qualify as 116
qualified domestic trusts.
The Omnibus Budget Reconciliation Act of 1990 (OBRA90)117 contained one modification of the
estate and gift tax provisions. OBRA90 completely altered the transfer tax approach to the estate
tax freeze which had been enacted in 1987 and amended in 1988. The previous approach to tax
avoidance through freeze transactions was to include the at death value of property transferred in 118
this manner in the estate of the transferor as a retained interest. OBRA90 repealed section
Under OBRA90 the focus changed from the estate tax to the gift tax. The act added new rules for
determining if the transfer constituted a gift and, if so, valuating the transferred interest at the
time of the freeze transaction for gift tax purposes. These new rules were premised upon the
general principal that the value of a residual interest is determined by subtracting the value of any
retained interests from the value of the entire business entity, adjusted to reflect percentage of
ownership or control. OBRA90 changed the gift tax consequences of the freeze transaction by
establishing the value of the rights retained in the transaction at zero or a much lower value than
that which would have been found under prior law, thus greatly increasing the value of the 120
transferred (gifted) interest.
113 P.L. 101-239, § 7815(d)(7)(A).
114 P.L. 101-239, § 7815(d)(7)(B).
115 P.L. 101-239, § 7815(d)(14).
116 P.L. 101-239, § 7815(d)(8).
117 P.L. 101-508, 101st Cong., 2nd Sess. (1990).
118 See, 26 U.S.C. § 2036.
119 P.L. 101-508, § 11601.
120 P.L. 101-508, § 11602.
The Omnibus Budget Reconciliation Act of 1993121 amended the transfer taxes by restoring122 the 123
top two tax rates to 53 percent and 55 percent, effective retroactively to December 31, 1992.
The Taxpayer Relief Act of 1997 (TRA)124 amended all three of the transfer taxes. The unified
credit was increased for the first time since 1981. The terminology was changed from unified
credit to applicable exclusion amount. TRA phased in an increase in this applicable exclusion 125
amount from $600,000 in 1997 to $1,000,000 in 2006 (See, column 2 in chart below). While
this amount was not indexed for inflation, TRA did bring indexation to the estate and gift taxes
for the first time. The following amounts were indexed for inflation beginning in 1998: the
$10,000 annual exclusion for gifts; the $750,000 ceiling on special use valuation; the $1,000,000
generation-skipping tax exemption; and the $1,000,000 ceiling on the value of a closely-held 126
business eligible for special low interest rates.
TRA created a new exclusion from the estate tax for qualified family-owned businesses. Under
this exclusion the executor of a qualified estate was empowered to elect special estate tax
treatment for qualified “family-owned business interests.” This exclusion was limited to a total of 127
$1,300,000 when combined with the applicable exclusion amount of the unified credit. Thus
the family-owned business exclusion was scheduled to decrease as the applicable exclusion
Table 1. Applicable Exclusion amount and Family-Owned Business Exclusion
Year Applicable Exclusion amount Business Exclusion Total Exclusion
1998 $625,000 $675,000 $1,300,000
1999 $650,000 $650,000 $1,300,000
2000-1 $675,000 $625,000 $1,300,000
2002-3 $700,000 $600,000 $1,300,000
2004 $850,000 $450,000 $1,300,000
2005 $950,000 $350,000 $1,300,000
2006+ $1,000,000 $300,000 $1,300,000
121 P.L. 103-66, 103rd Cong., 1st Sess. (1993).
122 The top rate had dropped to 50 percent on December 31, 1992.
123 P.L. 103-66, § 13208.
124 P.L. 105-34, 105th Cong., 1st Sess. (1997).
125 P.L. 105-34, § 501. Instead of the code referring to an amount of credit and one having to compute the size of
taxable estate which would be covered by that size of credit, the code now sets out the amount of the taxable estate
which the unified credit will cover.
127 P.L. 105-34, § 502.
The TRA defined “qualified estate” 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 128
qualified heirs exceeds 50 percent of the decedent’s adjusted gross estate. “Qualified heir” was
defined to include any individual who has been employed in the business for at least 10 years 129
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 is held at least 50 percent by one family, 70
percent by two families, or 90 percent by three families, as long as the decedent’s family owns at 130
least 30 percent of the business.
To qualify for the beneficial treatment afforded family-owned businesses under TRA, 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 131
eight year period within ten years following the decedent’s death.
Other changes in the transfer taxes found in TRA included a reduction in the interest rate on 132
installment payments of estate taxes attributable to closely held businesses; denial of 133
revaluation of gifts for estate tax purposes after the expiration of the statute of limitations; 134
repeal of the throwback rules applicable to domestic trusts; reduction in the estate tax for 135
certain land subject to permanent conservation easements; and modification of the generation-136
skipping transfer tax for transfers to individuals with deceased parents.
In addition to clarifying and making several technical amendments to changes enacted in 1997, 137
the Internal Revenue Service Restructuring and Reform Act of 1998 contained one more
substantive amendment to the estate tax. This amendment converted the family-owned business 138
exclusion into a deduction. The act also coordinated this new deduction with the unified credit
to increase benefits to the estates with qualified family-owned business interests as the unified
credit increases. The act provided that if an executor elected to use the family-owned business
deduction, the estate tax liability would be calculated as if the estate were allowed a maximum
qualified business deduction of $675,000 and an applicable exclusion amount of $625,000,
128 P.L. 105-34, § 502. The formula for calculating this percentage was included in the section.
129 P.L. 105-34, § 502. TRA incorporated by reference the definition of “family member” from I.R.C. § 2032A(e)(1),
which included 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).
130 P.L. 105-34, § 502. Again, TRA utilized the definition of “family member” from I.R.C. § 2032A(e)(1).
131 P.L. 105-34, § 502. Recapture rules were included if the heirs failed to meet these participation rules.
132 P.L. 105-34, § 503.
133 P.L. 105-34, § 506.
134 P.L. 105-34, § 507.
135 P.L. 105-34, § 508.
136 P.L. 105-34, § 511.
137 P.L. 105-206.
138 P.L. 105-206 § 6007(b)(1)(A).
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 is increased on a
dollar for dollar basis, limited to the applicable exclusion amount generally available for the year 139
The Economic Growth and Tax Relief Reconciliation Act of 2001140 generally repealed the
federal estate and generation-skipping transfer taxes at the end of the year 2009, provided for the
phasing 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 applicable in the phaseout period.
The federal estate tax and the generation-skipping transfer tax shall not be applied to decedents 141
dying or generation-skipping transfers made after December 31, 2009.
The phaseout of the estate tax is being accomplished primarily by adjusting three features of the 142
tax. The top rate is being gradually lowered. The applicable exclusion amount is being 143
gradually raised. The credit for death taxes (estate or inheritance taxes) paid to a State was 144
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 was 145
repealed, and, after the applicable exclusion amount had surpassed the $1,300,000 level used to 146
protect family owned businesses, the family owned business deduction was repealed.
139 P.L. 105-206 § 6007(b)(1)(B).
140 P.L. 107-16, 107th Cong., 1st Sess. (2001).
141 P.L. 107-16, § 501. It should be noted that for purposes of compliance with the Congressional Budget Act, P.L. 107-
16, § 901 provides for sunset of its provisions at the end of the year 2010. Therefore, absent Congressional action in the
interim, the law governing the estate, gift and generation-skipping transfer taxes would revert to the law which was in
place on June 7, 2001.
142 P.L. 107-16, § 511. The 50% rate in 2002 was to be the maximum rate on taxable estates on the portion in excess of
$2,500,000. The top rates in succeeding years are to be the maximum rates on taxable estates on the portion in excess
143 P.L. 107-16, § 521. The applicable exclusion amount is a unified amount which can be exempted from the gift
and/or estate tax. After the applicable exclusion amount surpassed $1,000,000 in the year 2004, the amount which may
be exempted from gifts was limited to $1,000,000, with the remainder of the exempt amount reserved to the taxable
144 P.L. 107-16, § 531 and § 532. Generally the maximum allowable credit was the lesser of the net tax paid to the State
or the statutory ceiling of 26 U.S.C. § 2011(b) ( a percentage of the taxable estate minus $60,000). Many States used
the maximum credit allowed under § 2001(b) to constitute the State’s estate tax.
145 P.L. 107-16, § 511(b).
146 P.L. 107-16, § 521. The family owned business deduction allowed $625,000 in value of qualified family owned
Table 2. Schedule of Changes
Year Top Rate Exclusion Credit for State Death Tax Other Scheduled Changes
2002 50% $1,000,000 75% of current allowable credit. Repeal of 5% surtax.
2003 49% $1,000,000 50% of current allowable credit. —
2004 48% $1,500,000 25% of current allowable credit. Repeal of family owned business
2005 47% $1,500,000 Credit repealed. Deduction for tax —
paid to State.
2006 46% $2,000,000 Deduction for tax paid to State. —
2007 45% $2,000,000 Deduction for tax paid to State. —
2008 45% $2,000,000 Deduction for tax paid to State. —
2009 45% $3,500,000 Deduction for tax paid to State. —
The phaseout of the generation-skipping tax is being accomplished primarily through lowering
the rates and increasing the lifetime exemption. The generation-skipping transfer tax is imposed 147
at the top rate of the estate tax. Therefore, when the top rate of the estate tax is lowered under
the act, it has the affect of lowering the generation-skipping tax as well. The lifetime exemption is 148
increased by making the exemption equal to the estate tax applicable exclusion amount.
The gift tax was not repealed as originally proposed in order to protect the integrity of the income
tax. It was felt that, absent a gift tax, income producing property could be gifted to taxpayers in
lower brackets, sold, the taxes paid, and the proceeds gifted back to the higher bracket taxpayer,
thus avoiding great amounts of income tax on the sale of capital assets.
The gift tax was modified by lowering the rates and increasing the applicable exclusion amount. 149
The top rate of the gift tax declines with the top rate of the estate tax. After the repeal of the 150
estate tax, the top gift tax rate is lowered to 35% of the excess over $500,000. The applicable
exclusion amount was raised to $1,000,000 in the year 2002. This amount remains constant 151
through the phaseout period of the estate tax and after the repeal of the estate tax. Thus, when
the unified applicable exclusion amount increases for the estate tax in the phaseout period, only
$1,000,000 may be used to cover lifetime transfers (i.e., gifts).
business to be deducted from the estate. If an estate opted to use this deduction, the estate was limited to a $675,000
applicable exclusion amount, giving a total of $1,300,000 which was deducted from the estate. Therefore, when the
applicable exclusion amount exceeded the $1,300,000 level, it was no longer useful and therefore was repealed.
147 26 U.S.C. § 2641.
148 P.L. 107-16, § 521(c).
149 P.L. 107-16, § 511(c), see discussion above.
150 P.L. 107-16, § 511(d).
151 P.L. 107-16, § 521.
Technically the new 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. Currently, the basis in property received from a decedent is 152
a “stepped-up” basis. The inheritor of property, instead of having the basis of the one from
which he received the property (a carry-over basis), has a basis in the property of the fair market
value of the property at the date of death of the decedent. The purpose of the stepped-up basis
rule was to avoid double taxation. The property had 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. With the repeal of the estate tax, this need for the stepped-up basis rules will be
The act repeals the stepped-up basis rule at the end of the year 2009 (when the estate tax is 153
repealed). The new basis rule will be that the basis in property received from a decedent is the
lesser of carry-over basis or the fair market value of the property on the date of death of the 154
Under the estate tax and the income tax stepped-up basis rules, an amount of the gross estate was 155
not subject to either tax. To compensate for the loss of the exempt property with the repeal of
the estate tax and the change to carry-over basis, the act provides for two amounts of property
which may still receive stepped-up basis. Every estate may allocate $1,300,000 basis increase to 156
property in the taxable estate. In addition to this general step-up, property passing to the spouse 157
of the decedent may be allocated up to $3,000,000 basis increase. Each of these amounts is to
be indexed for inflation.
The act required certain new returns to be filed to provide information for administration of the 158
new basis rules.
The act removed the mileage restrictions for the estate tax rule for creation of conservation 159
easements. This amendment applied to the estates of decedents dying after December 31, 2000.
152 26 U.S.C. § 1014.
153 P.L. 107-16, § 541.
154 P.L. 107-16, § 542.
155 The applicable exclusion amount and all property passing to the spouse under the unlimited marital deduction would
be not 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.
156 P.L. 107-16, § 542. A decedent who is a nonresident not a citizen is limited to a $60,000 step-up.
157 P.L. 107-16, § 542.
158 P.L. 107-16, § 542, amending 26 U.S.C. §§ 6018 & 6019.
159 P.L. 107-16, § 551.
The act modified the generation-skipping transfer tax allocation rules for certain lifetime transfers 160
to a trust.
The Economic Growth and Tax Relief Reconciliation Act of 2001161 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, and
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 162
of the 2001 act.
Two primary categories of legislation pertaining to transfer taxes may be expected to be th
introduced in the 111 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/or in a manner more considerate of family-owned
The federal system of transfer taxes has represented an important part of the federal tax structure
for the past 85 years, not so much in terms of revenue produced, but in terms of impact on
individual taxpayers and their personal and business decisions. The history of the estate, gift, and
generation-skipping taxes shows a mixed desire to raise revenue and to promote certain social
goals. These goals include (1) reducing large estates and inheritances; while (2) alleviating the
burden on small and moderate sized estates and facilitating the continued operation of family
businesses. The phaseout and repeal of the estate and generation-skipping transfer taxes meets the
second of these goals, but leaves the first unaddressed, at least from perspective of tax policy.
John R. Luckey
160 P.L. 107-16, §§ 561 to 563.
161 P.L. 107-16
162 P.L. 107016 at § 901.