Federal Estate, Gift, and Generation-Skipping Taxes: A Description of Current Law

Publication Date: January 2003

Publisher: Library of Congress. Congressional Research Service

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This report contains an explanation of the major provisions of the Federal estate, gift, and generation-skipping transfer taxes. The discussion divides the Federal estate tax into three components: the gross estate, deductions from the gross estate, and computation of the tax, including allowable tax credits. The Federal estate tax is computed through a series of adjustments and modifications of a tax base known as the "gross estate." Certain allowable deductions reduce the gross estate to the "taxable estate," to which is then added the total of all lifetime taxable gifts made by the decedent. The tax rates are applied and, after reduction for certain allowable credits, the amount of tax owed by the estate is reached.

This discussion divides the Federal gift tax into two components: the taxable gift and the gift tax computation. The Federal gift tax is imposed on lifetime gifts of property. The tax depends in large part upon the fundamental element--the value of the "taxable gift." The taxable gift is determined by reducing the gross value of the gift by the available deductions and exclusions. The gift tax liability determined on the basis of the donor's taxable gifts may be reduced by the available unified transfer tax credit.

The purpose of the generation-skipping transfer tax is to close a loophole in the estate and gift tax system where property could be transferred to successive generations without intervening estate or gift tax consequences. There are two basic forms of generation-skipping transfers; the indirect skip, where the generation one level below the decedent receives some beneficial interest in the property before the property passes to the generation two or more levels below, and the direct skip, where the property passes directly to the generation two or more levels below the decedent. This discussion describes the tax on these types of transfers, its computation and implementation, and use of such concepts as generation assignment and inclusion ratios.

The Economic Growth and Tax Relief Reconciliation Act of 2001 generally repealed the Federal estate and generation-skipping transfer taxes at the end of the year 2009, provided for the phase out of these taxes over the period 2002 to 2009, lowered and modified the gift tax, provided new income tax carry-over basis rules for property received from a decedent, and made other general amendments which will be applicable in the phase out period. The phase out of the estate tax is to be accomplished primarily by adjusting three features of the tax. The top rate is to be gradually lowered. The applicable exclusion amount is to be gradually raised. The credit for death taxes (estate or inheritance taxes) paid to a State is to be gradually lowered and replaced by a deduction for such taxes. Also, the 5% surtax used to recapture the benefits of the graduated tax rates on taxable estates of over $10,000,000 is repealed, and, after the applicable exclusion amount has surpassed the $1,300,000 level used to protect family owned businesses, the family owned business deduction is repealed.