DESCRIPTION OF THE CHAIRMAN’S AMENDMENT

IN THE NATURE OF A SUBSTITUTE TO H.R. 8,

“THE DEATH TAX ELIMINATION ACT”

Scheduled for Markup

before the

HOUSE COMMITTEE ON WAYS AND MEANS

on March 29, 2001

Prepared by 

the Staff of the

JOINT COMMITTEE ON TAXATION

JCX-20-01

March 28, 2001
(i)

CONTENTS

Page

INTRODUCTION.......................................................................................................... 1

I. PHASE IN REPEAL OF ESTATE, GIFT, AND GENERATION-SKIPPING

TRANSFER TAXES .............................................................................................. 2

II. EXPAND AVAILABILITY OF ESTATE TAX EXCLUSION FOR

CONSERVATION EASEMENTS ......................................................................... 14

III. MODIFY GENERATION-SKIPPING TRANSFER TAX RULES ...................... 16

A. Deemed Allocation of the Generation-Skipping Transfer Tax Exemption

to Lifetime Transfers to Trusts That are Not Direct Skips ............................ 16

B. Retroactive Allocation of the Generation-Skipping Transfer Tax

Exemption...................................................................................................... 19

C. Severing of Trusts Holding Property Having an Inclusion Ratio of Greater

Than Zero....................................................................................................... 20

D. Modification of Certain Valuation Rules....................................................... 21

E. Relief From Late Elections ............................................................................ 22

F. Substantial Compliance.................................................................................. 23

IV. EXPAND AVAILABILITY OF INSTALLMENT PAYMENT OF

ESTATE TAX FOR ESTATES OF DECEDENTS WITH AN INTEREST

IN A CLOSELY-HELD BUSINESSES ................................................................. 24
1

INTRODUCTION

The House Committee on Ways and Means has scheduled a markup of the provisions of 

H.R. 8, the “Death Tax Elimination Act,” on March 29, 2001.

This document,1 prepared by the staff of the Joint Committee on Taxation, provides a 

description of present law and the provisions of a Chairman’s amendment in the nature of a 

substitute to the provisions of H.R. 8.

 

1

 This document may be cited as follows: Joint Committee on Taxation, Description of 

the Chairman’s Amendment in the Nature of a Substitute to H.R. 8, “The Death Tax Elimination 

Act,” (JCX-20-01), March 28, 2001.
2

I. PHASE IN REPEAL OF ESTATE, GIFT, AND

GENERATION-SKIPPING TRANSFER TAXES

Present Law

Estate and gift tax rules

In general

Under present law, a gift tax is imposed on lifetime transfers and an estate tax is imposed 

on transfers at death. The gift tax and the estate tax are unified so that a single graduated rate 

schedule applies to cumulative taxable transfers made by a taxpayer during his or her lifetime 

and at death. The unified estate and gift tax rates begin at 18 percent on the first $10,000 in 

cumulative taxable transfers and reach 55 percent on cumulative taxable transfers over $3 

million. In addition, a 5-percent surtax is imposed on cumulative taxable transfers between $10 

million and $17,184,000, which has the effect of phasing out the benefit of the graduated rates. 

Thus, these estates are subject to a top marginal rate of 60 percent. Estates over $17,184,000 are 

subject to a flat rate of 55 percent, as the benefit of the graduated rates has been phased out.

Gift tax annual exclusion

Donors of lifetime gifts are provided an annual exclusion of $10,000 (indexed for 

inflation occurring after 1997) of transfers of present interests in property to any one donee 

during the taxable year. If the non-donor spouse consents to split the gift with the donor spouse, 

then the annual exclusion is $20,000. Unlimited transfers between spouses are permitted without 

imposition of a gift tax.

Unified credit

A unified credit is available with respect to taxable transfers by gift and at death. The 

unified credit amount effectively exempts from tax transfers totaling $675,000 in 2001, $700,000 

in 2002 and 2003, $850,000 in 2004, $950,000 in 2005, and $1 million in 2006 and thereafter. 

The benefit of the unified credit applies at the lowest estate and gift tax rates. For example, in 

2001, the unified credit applies between the 18-percent and 37-percent estate and gift tax rates. 

Thus, in 2001, taxable transfers, after application of the unified credit, are effectively subject to 

estate and gift tax rates beginning at 37 percent.

Transfers to a surviving spouse

A 100-percent marital deduction generally is permitted for the value of property 

transferred between spouses. In addition, transfers of a “qualified terminable interest” also are 

eligible for the marital deduction. A “qualified terminable interest” is property: (1) which 

passes from the decedent, (2) in which the surviving spouse has a “qualifying income interest for 

life,” and (3) to which an election under these rules applies. A “qualifying income interest for 

life” exists if: (1) the surviving spouse is entitled to all the income from the property (payable 

annually or at more frequent intervals) or the right to use property during the spouse’s life, and 

(2) no person has the power to appoint any part of the property to any person other than the 

surviving spouse.
3

Expenses, indebtedness, and taxes

An estate tax deduction is allowed for funeral expenses and administration expenses of an 

estate. An estate tax deduction also is allowed for claims against the estate and unpaid 

mortgages on, or any indebtedness in respect of, property for which the value of the decedent’s 

interest therein, undiminished by the debt, is included in the value of the gross estate.

 If the total amount of claims and debts against the estate exceeds the value of the 

property to which the claims relate, an estate tax deduction for the excess is allowed, provided 

such excess is paid before the due date of the estate tax return. A deduction for claims against 

the estate generally is permitted only if allowable by the law of the jurisdiction under which the 

estate is being administered.

A deduction also is allowed for the full unpaid amount of any mortgage upon, or of any 

other indebtedness in respect of, any property of the gross estate (including interest which has 

accrued thereon to the date of the decedent’s death), provided that the full value of the 

underlying property is included in the decedent’s gross estate.

Basis of property received

In general.--A taxpayer who receives property from a decedent’s estate or from a donor 

of a lifetime gift may want to sell or otherwise dispose of the property. Gain or loss, if any, on 

the disposition of the property is measured by the taxpayer’s amount realized (e.g., gross 

proceeds received) on the disposition, less the taxpayer’s basis in such property.

Basis generally represents a taxpayer’s investment in property with certain adjustments 

required after acquisition. For example, basis is increased by the cost of capital improvements 

made to the property and decreased by depreciation deductions taken with respect to the 

property.

Property received from a donor of a lifetime gift takes a carryover basis. “Carryover 

basis” means that the basis in the hands of the donee is the same as it was in the hands of the 

donor plus any gift tax paid on any unrealized appreciation. The basis of a lifetime gift, 

however, generally may not exceed the property’s fair market value on the date of the gift.

Property passing from a decedent’s estate generally takes a stepped-up basis. “Steppedup basis” for estate tax purposes means that the basis of property passing from a decedent’s 

estate generally is the fair market value on the date of the decedent’s death (or, if the alternate 

valuation date is elected, the earlier of six months or the date the property is sold or distributed 

by the estate). This step up (or step down) in basis eliminates the recognition of any income on 

the appreciation of the property that occurred prior to the decedent’s death, and has the effect of 

eliminating the tax benefit from any unrealized loss.

Special rules for interests in certain foreign entities.--Stepped-up basis treatment 

generally is denied to certain interests in foreign entities. Under present law, stock or securities 

in a foreign personal holding company takes a carryover basis. Stock in a foreign investment 

company takes a stepped up basis reduced by the decedent’s ratable share of accumulated 

earnings and profits. In addition, stock in a passive foreign investment company (including those 
4

for which a mark-to-market election has been made) generally takes a carryover basis, except 

that a passive foreign investment company for which a decedent shareholder had made a 

qualified electing fund election is allowed a stepped up basis. Stock owned by a decedent in a 

domestic international sales corporation (or former domestic international sales corporation) 

takes a stepped up basis reduced by the amount (if any) which would have been included in gross 

income under section 995(c) as a dividend if the decedent had lived and sold the stock at its fair 

market value on the estate tax valuation date (i.e., generally the date of the decedent’s death 

unless an alternate valuation date is elected).

Provisions affecting small and family-owned businesses and farms

Special-use valuation.--An executor may elect for estate tax purposes to value certain 

“qualified real property” used in farming or another qualifying closely-held trade or business at 

its current-use value, rather than its fair market value. The maximum reduction in value for such 

real property is $750,000 (adjusted for inflation occurring after 1997). Real property generally 

may qualify for special-use valuation if at least 50 percent of the adjusted value of the decedent’s 

gross estate consists of a farm or closely-held business assets in the decedent’s estate (including 

both real and personal property) and at least 25 percent of the adjusted value of the gross estate 

consists of farm or closely-held business property. In addition, the property must be used in a 

qualified use (e.g., farming) by the decedent or a member of the decedent’s family for five of the 

eight years before the decedent’s death.

If, after a special-use valuation election is made, the heir who acquired the real property 

ceases to use it in its qualified use within 10 years of the decedent’s death, an additional estate 

tax is imposed in order to recapture the entire estate-tax benefit of the special-use valuation.

Family-owned business deduction.--An estate is permitted to deduct the adjusted value of 

a qualified-family owned business interest of the decedent, up to $675,000.2 A qualified familyowned business interest is defined as any interest in a trade or business (regardless of the form in 

which it is held) with a principal place of business in the United States if the decedent’s family 

owns at least 50 percent of the trade or business, two families own 70 percent, or three families 

own 90 percent, as long as the decedent’s family owns at least 30 percent of the trade or 

business. An interest in a trade or business does not qualify if any interest in the business (or a 

related entity) was publicly-traded at any time within three years of the decedent’s death. An 

interest in a trade or business also does not qualify if more than 35 percent of the adjusted 

ordinary gross income of the business for the year of the decedent’s death was personal holding 

company income. In the case of a trade or business that owns an interest in another trade or 

 

2

 The qualified family-owned business deduction and the unified credit effective 

exemption amount are coordinated. If the maximum deduction amount of $675,000 is elected, 

then the unified credit effective exemption amount is $625,000, for a total of $1.3 million. If the 

qualified family-owned business deduction is less than $675,000, then the unified credit effective 

exemption amount is equal to $625,000, increased by the difference between $675,000 and the 

amount of the qualified family-owned business deduction. However, the unified credit effective 

exemption amount cannot be increased above the generally applicable exemption amount in 

effect for the taxable year.
5

business (i.e., “tiered entities”), special look-through rules apply. The value of a trade or 

business qualifying as a family-owned business interest is reduced to the extent the business 

holds passive assets or excess cash or marketable securities.

To qualify for the exclusion, the decedent (or a member of the decedent’s family) must 

have owned and materially participated in the trade or business for at least five of the eight years 

preceding the decedent’s date of death. In addition, at lease one qualified heir (or member of the 

qualified heir’s family) is required to materially participate in the trade or business for at least 10 

years following the decedent’s death.

The qualified family-owned business rules provide a graduated recapture based on the 

number of years after the decedent’s death in which the disqualifying event occurred. Under the 

provision, if the disqualifying event occurred within six years of the decedent’s death, then 100 

percent of the tax is recaptured. The remaining percentage of recapture based on the year after 

the decedent’s death in which a disqualifying event occurs is as follows: the disqualifying event 

occurs during the seventh year after the decedent’s death, 80 percent; the disqualifying event 

occurs during the eighth year after the decedent’s death, 60 percent; the disqualifying event 

occurs during the ninth year after the decedent’s death, 40 percent; and the disqualifying event 

occurs during the tenth year after the decedent’s death, 20 percent. For purposes of the qualified 

family-owned business deduction, the contribution of a qualified conservation easement is not 

considered a disposition that would trigger recapture of estate tax.

In general, there is no requirement that the qualified heir (or members of his or her 

family) continue to hold or participate in the trade or business more than 10 years after the 

decedent’s death. However, the 10-year recapture period may be extended for a period of up to 

two years if the qualified heir does not begin to use the property for a period of up to two years 

after the decedent’s death.

An estate may claim the benefits of both the qualified family-owned business deduction 

and special-use valuation. For purposes of determining whether the value of the trade or 

business exceeds 50 percent of the decedent’s gross estate, if the estate claimed special-use 

valuation, then the property’s special-use value is used.

State death tax credit

A credit is allowed against the Federal estate tax for any estate, inheritance, legacy, or 

succession taxes actually paid to any state or the District of Columbia with respect to any 

property included in the decedent’s gross estate. The maximum amount of credit allowable for 

State death taxes is determined under a graduated rate table, based on the size of the decedent’s 

adjusted taxable estate. Most States impose a “pick-up” or “soak-up” estate tax, which applies 

when the State death tax liability is less than the maximum Federal death tax credit. In such a 

case, a tax is imposed by the State, which is equal to the difference between the State death tax 

liability and the maximum State death tax credit. This provides States with the maximum 

amount of death tax for which the State death tax credit provides.
6

Estate and gift taxation of nonresident noncitizens

Nonresident noncitizens are subject to gift tax with respect to certain transfers by gift of 

U.S.-situated property. Such property includes real estate and tangible property located within 

the United States. Nonresident noncitizens generally are not subject to U.S. gift tax on the 

transfer of intangibles, such as stock or securities, regardless of where such property is situated.

Estates of nonresident noncitizens generally are taxed at same estate tax rates applicable 

to U.S. citizens, but the taxable estate includes only property situated within the United States 

that is owned by the decedent at death. This includes the value at death of all property, real or 

personal, tangible or intangible, situated in the United States. Special rules apply which treat 

certain property as being situated within and without the United States for these purposes.

Unless modified by a treaty, a nonresident who is not a U.S. citizen generally is allowed a 

unified credit of $13,000, which effectively exempts $60,000 in assets from estate tax.

Generation-skipping transfer tax

A generation-skipping transfer tax generally is imposed on transfers, either directly or 

through a trust or similar arrangement, to a “skip person” (i.e., a beneficiary in a generation more 

than one generation below that of the transferor). Transfers subject to the generation-skipping 

transfer tax include direct skips, taxable terminations, and taxable distributions. The generationskipping transfer tax is imposed at a flat rate of 55 percent (i.e., the top estate and gift tax rate) 

on cumulative generation-skipping transfers in excess of $1 million (indexed for inflation 

occurring after 1997).

Selected income tax provisions

Transfers to certain foreign trusts and estates

Transfers by a U.S. person to a foreign trust or estate generally is treated as a sale or 

exchange of the property for an amount equal to the fair market value of the transferred property. 

The amount of gain that must be recognized by the transferor is equal to the excess of the fair 

market value of the property transferred over the adjusted basis (for purposes of determining 

gain) of such property in the hands of the transferor.

Net operating loss and capital loss carryovers

Under present law, a capital loss and net operating loss from business operations 

sustained by a decedent during his last taxable year are deductible only on the final return filed in 

his or her behalf. Such losses are not deductible by his or her estate.

Transfers of property in satisfaction of a pecuniary bequest

Under present law, gain or loss is recognized on the transfer of property in satisfaction of 

a pecuniary bequest (i.e., a bequest of a specific dollar amount) to the extent that the fair market 

value of the property at the time of the transfer exceeds the basis of the property, which generally 

is the basis stepped up to fair market value on the date of the decedent’s death.
7

Income tax exclusion for the gain on the sale of a principal residence

A taxpayer generally may exclude up to $250,000 ($500,000 if married filing a joint 

return) of gain realized on the sale or exchange of a principal residence. The exclusion is 

allowed each time a taxpayer selling or exchanging a principal residence meets the eligibility 

requirements, but generally no more frequently than once every two years.

To be eligible, a taxpayer must have owned the residence and occupied it as a principal 

residence for at least two of the five year prior to the sale or exchange. A taxpayer who fails to 

meet these requirements by reason of a change of place of employment, health, or other 

unforeseen circumstances is able to exclude the fraction of the $250,000 ($500,000 if married 

filing a joint return) equal to the fraction of two years that these requirements are met.

Excise tax on nonexempt trusts

Under present law, a split-interest trust may be subject to certain restrictions that are 

applicable to private foundations if an income, estate, or gift tax charitable deduction was 

allowed with respect to the trust. A split-interest trust subject to these rules would be prohibited 

from engaging in self-dealing, retaining any excess business holdings, and from making certain 

investments or taxable expenditures. Failure to comply with the restrictions would subject the 

split-interest trust to certain excise taxes imposed on private foundations, which include excise 

taxes on self-dealing, excess business holdings, investments which jeopardize charitable 

purposes, and certain taxable expenditures.

Description of Proposal

Overview of proposal

Beginning in 2011, the estate, gift, and generation-skipping transfer taxes would be 

repealed. After repeal, the basis of assets received from a decedent generally would equal the 

basis of the decedent (i.e., carryover basis) at death. However, a decedent’s estate would be 

permitted to increase the basis of assets transferred by up to a total of $1.3 million. The basis of 

property transferred to a surviving spouse could be increased by an additional $3 million. Thus, 

the basis of property transferred to a surviving spouse could be increased by a total of $4.3 

million. In no case could the basis of an asset be adjusted above its fair market value. For these 

purposes, the executor would elect which assets receive an increase in basis and the extent to 

which each asset receives an increase in basis. The $1.3 million and $3 million amounts would 

be adjusted annually for inflation occurring after December 31, 2010.

In 2002, the unified credit would be replaced with a unified exemption, the 5-percent 

surtax, which phases out the benefit of the graduated rates, and the rates in excess of 53 percent 

would be repealed. Beginning in 2003, the estate, gift, and generation-skipping transfer tax rates 

would be reduced each year until the estate, gift, and generation-skipping transfer taxes are 

repealed in 2011.
8

Phaseout and repeal of estate, gift, and generation-skipping transfer taxes

In general

In 2002, the top estate and gift tax rates above 53 percent would be repealed, as would 

the 5-percent surtax, which phases out the benefit of the graduated rates. In 2003, all rates in 

excess of 50 percent would be repealed. In each year 2004 through 2006, each of the rates of tax 

would be reduced by one percentage point. In each year 2007 through 2010, each of the rates of 

tax would be reduced by two percentage points. The generation-skipping transfer tax rate for a 

given year would be the highest estate and gift tax rate in effect for that year. The reduction in 

estate and gift tax rates would be coordinated with the income tax rates such that the highest 

estate and gift tax rate (and, thus, the generation-skipping transfer tax rate) would not be reduced 

below the top individual tax rate, and the lower estate and gift tax rates would not be reduced 

below the lowest individual tax rate. For each year 2002 through 2010, the State death tax credit 

rates would be reduced in proportion to the reduction in the estate and gift tax rates.

Beginning in 2011, the estate, gift, and generation-skipping transfer taxes would be 

repealed.

Replace unified credit with unified exemption

Beginning in 2002, the unified credit would be replaced with a unified exemption 

amount. The unified exemption amount, which would follow the dollar amounts of the present 

law unified credit effective exemption amounts, would be determined as follows: in 2002 and 

2003, $700,000; in 2004, $850,000; in 2005, $950,000; and in 2006 and thereafter (until repeal 

in 2011), $1 million. For decedents who are not residents and not citizens of the United States, 

the exemption would be $60,000.

Basis of property acquired from a decedent

In general

Beginning in 2011, after the estate, gift, and generation-skipping transfer taxes have been 

repealed, the present-law rules providing for a fair market value basis for property acquired from 

a decedent would be repealed. Instead, a carryover basis regime generally would take effect. 

Recipients of property transferred at the decedent’s death generally would receive the 

transferor’s adjusted basis in the property, but not in excess of the fair market value of the 

property on the date of the decedent’s death (i.e., recipients generally would take a carryover 

basis in the property).

Basis increase for certain property

The proposal also would allow an executor to increase the decedent’s basis in assets 

transferred to beneficiaries at death. Under this rule, a decedent’s estate generally would be 

permitted to increase the basis of assets transferred by up to a total of $1.3 million. The $1.3 

million would be increased by the amount of unused capital losses, net operating losses, and 

certain “built-in” losses of the decedent. In addition, the basis of property transferred to a 

surviving spouse could be increased by an additional $3 million. Thus, the basis of property 
9

transferred to surviving spouses could be increased by a total of $4.3 million. Basis increase 

would be allocable on an asset-by-asset basis (e.g., basis increase could be allocated to a share of 

stock or a block of stock). However, in no case could the basis of an asset be adjusted above its 

fair market value. For these purposes, the executor would elect which assets receive a step up in 

basis and determine the extent to which each asset receives an increase in basis. The $1.3 

million and $3 million amounts are adjusted annually for inflation occurring after December 31, 

2010.

Nonresidents who are not U.S. citizens would be allowed to increase the basis of property 

by up to $60,000 (indexed for inflation occurring after December 31, 2010).

Certain property would not be eligible for a basis increase. This includes: (1) property 

that was acquired by the decedent by gift (other than from his or her spouse) during the threeyear period ending on the date of the decedent’s death; (2) property that constitutes a right to 

receive income in respect of a decedent; (3) stock or securities of a foreign personal holding 

company; (4) stock of a domestic international sales corporation (or former domestic 

international sales corporation); (5) stock of a foreign investment company; and (6) stock of a 

passive foreign investment company (except for which a decedent shareholder had made a 

qualified electing fund election).

The character of gain on the sale of property received from a decedent’s estate would be 

treated the same as if the property had been acquired by gift. For example, real estate that has 

been depreciated and would be subject to recapture if sold by the decedent would be subject to 

recapture if sold by the heir.

Reporting requirements

In general

Lifetime gifts.--A donor would be required to report to the Internal Revenue Service 

(“IRS”) the basis and character of any non-cash property received by gift with a value in excess 

of $25,000 (except for gifts to charitable organizations). The donor would be required to report 

to the IRS: 

• the name and taxpayer identification number of the donee,

• an accurate description of the property,

• the adjusted basis of the property in the hands of the donor at the time of gift,

• the donor’s holding period for such property,

• sufficient information to determine whether any gain on the sale of the property 

would be treated as ordinary income, and

• any other information as the Treasury Secretary may prescribe.
10

Similar information (including the name, address, and phone number of the person making the 

return) would be required to be provided to recipients of such property.

Transfers at death.--For transfers at death of non-cash assets in excess of $1.3 million and 

for appreciated property the value of which exceeds $25,000 received by a decedent within three 

years of death, the executor of the estate (or the trustee of a revocable trust) would report to the 

IRS:

• the name and taxpayer identification number of the recipient of the property,

• an accurate description of the property,

• the adjusted basis of the property in the hands of the decedent and its fair market 

value at the time of death,

• the decedent’s holding period for the property,

• sufficient information to determine whether any gain on the sale of the property 

would be treated as ordinary income,

• the amount of basis increase allocated to the property, and

• any other information as the Treasury Secretary may prescribe.

Similar information (including the name, address, and phone number of the person making the 

return) would be required to be provided to recipients of such property.

Penalties for failure to file required information

Any donor required to report the basis and character of any non-cash property with a 

value in excess of $25,000 who fails to do so would be liable for a penalty of $500 for each 

failure to report such information to the IRS and $50 for each failure to report such information 

to a beneficiary.

Any person required to report to the IRS transfers at death of non-cash assets in excess of 

$1.3 million in value who fails to do so would be liable for a penalty of $10,000 for the failure to 

report such information. Any person required to report to the IRS the receipt by a decedent of 

appreciated property valued in excess of $25,000 within three years of death who fails to do so 

would be liable for a penalty of $500 for the failure to report such information to the IRS. There 

also would be a penalty of $50 for each failure to report such information to a beneficiary. 

No penalty would be imposed with respect to any failure that is due to reasonable cause. 

If any failure to report to the IRS or a beneficiary under the proposal is due to intentional 

disregard of the rules, then the penalty would be five percent of the fair market value of the 

property for which reporting was required, determined at the date of the decedent’s death (for 

property passing at death) or determined at the time of gift (for a lifetime gift).
11

Certain tax benefits extending past the date for repeal of the estate tax

Prior to repeal of the estate tax, many estates may have claimed certain estate tax benefits 

which, upon certain events, may trigger a recapture tax. Because repeal of the estate tax would 

be effective for decedents dying after December 31, 2010, these estate tax recapture provisions 

would continue to apply.

Qualified conservation easements

A donor may have retained a development right in the conveyance of a conservation 

easement that qualified for the estate tax exclusion. Those with an interest in the land may later 

execute an agreement to extinguish the right. If an agreement to extinguish development rights 

is not entered into within the earlier of (1) two years after the date of the decedent’s death or (2) 

the date of the sale of such land subject to the conservation easement time, then those with an 

interest in the land are personally liable for an additional tax. This provision would be retained 

after repeal of the estate tax, which would ensure that those persons with an interest in the land 

who fail to execute the agreement remain liable for any additional tax which may be due after 

repeal.

Special-use valuation

Property may have qualified for special-use valuation prior to repeal of the estate tax. If 

such property ceases to qualify for special-use valuation, for example, because an heir ceases to 

use the property in its qualified use within 10 years of the decedent’s death, then the estate-tax 

benefit is required to be recaptured. The recapture provision would be retained after repeal of 

the estate tax, which would ensure that those estates that claimed this benefit before repeal of the 

estate tax would be subject to recapture if a disqualifying event occurs after repeal.

Qualified family-owned business deduction

Property may have qualified for the family-owned business deduction prior to repeal of 

the estate tax. If such property ceases to qualify for the family-owned business deduction, for 

example, because an heir ceases to use the property in its qualified use within 10 years of the 

decedent’s death, then the estate-tax benefit is required to be recaptured. The recapture provision 

would be retained after repeal of the estate tax, which would ensure that those estates that 

claimed this benefit before repeal of the estate tax would be subject to recapture if a 

disqualifying event occurs after repeal.

Installment payment of estate tax for closely-held businesses

The present-law installment payment rules would be retained so that those estates that 

entered into an installment payment arrangement prior to repeal of the estate tax would continue 

to make their payments past the date for repeal.

If more than 50 percent of the value of the closely-held business is distributed, sold, 

exchanged, or otherwise disposed of, the unpaid portion of the tax payable in installments must 

be paid upon notice and demand from the Treasury Secretary. This rule would be retained after 

repeal of the estate tax, which would ensure that such dispositions that occur after repeal of the 
12

estate tax will continue to subject the estate to the unpaid portion of the tax upon notice and 

demand.

Transfers to foreign trusts, estates, and nonresidents who are not U.S. citizens

The present-law rule providing that transfers by a U.S. person to a foreign trust or estate 

generally is treated as a sale or exchange would be expanded. Under the proposal, transfers by a 

U.S. person to a nonresident who is not a U.S. citizen would be treated as a sale or exchange of 

the property for an amount equal to the fair market value of the transferred property. The 

amount of gain that must be recognized by the transferor is equal to the excess of the fair market 

value of the property transferred over the adjusted basis of such property in the hands of the 

transferor.

Transfers of property in satisfaction of a pecuniary bequest

Under the proposal, gain or loss on the transfer of property in satisfaction of a pecuniary 

bequest would be recognized only to the extent that the fair market value of the property at the 

time of the transfer exceeds the fair market value of the property on the date of the decedent’s 

death (not the property’s carryover basis).

Transfer of property subject to a liability

The proposal would clarify that gain is not recognized at the time of death when the 

estate or heir acquires from the decedent property subject to a liability that is greater than the 

decedent's basis in that property. Similarly, no gain would be recognized by the estate on the 

distribution of such property to a beneficiary of the estate by reason of the liability.

Income tax exclusion for the gain on the sale of a principal residence

The income tax exclusion of up to $250,000 of gain on the sale of a principal residence 

would be extended to estates and heirs. Under the proposal, if the decedent’s estate or an heir 

sells the decedent’s principal residence, $250,000 of gain may be excluded on the sale of the 

residence, provided the decedent used the property as a principal residence for two or more years 

during the five-year period prior to the sale. In addition, if an heir occupies the property as a 

principal residence, the decedent’s period of occupancy of the property as a principal residence 

may be added to the heir’s subsequent occupancy in determining whether the property was 

occupied for two years as a principal residence.

Excise tax on nonexempt trusts

A split-interest trust would be subject to certain restrictions that are applicable to private 

foundations if an income tax charitable deduction, including an income tax charitable deduction 

by an estate or trust, was allowed with respect to transfers to the trust.
13

Anti-abuse rules

The Secretary of the Treasury would be given authority to treat a transfer that purports to 

be a gift as having never been transferred, if, in connection with such transfer (1) the transferor 

(or any person related to or designated by the transferor or such person) has received anything of 

value in connection with the transfer from the transferee directly or indirectly or (2) there is an 

understanding or expectation that the transferor (or any person related to or designated by the 

transferor or such person) will receive anything of value in connection with the transfer from the 

transferee directly or indirectly.

Study mandated by the proposal

The proposal would require the Treasury Secretary to conduct a study of opportunities for 

avoidance of the income tax, if any, and potential increases in income tax revenues by reason of 

enactment of the proposal. The results of such study would be required to be submitted to the 

House Committee on Ways and Means and the Senate Committee on Finance no later than 

December 31, 2002.

Effective Date

The unified credit would be replaced with a unified exemption, the 5-percent surtax 

would be repealed, and the rate in excess of 53 percent (i.e., the 55 percent rate) would be 

repealed for estates of decedents dying and gifts and generation-skipping transfers made after 

December 31, 2001. The estate and gift tax rate in excess of 50 percent is repealed for estates of 

decedents dying and gifts and generation-skipping transfers made after December 31, 2002. 

The additional reductions of estate and gift tax rates and of the State death tax credit 

would occur in 2004 through 2010.

The estate, gift, and generation-skipping transfer taxes would be repealed and the 

carryover basis regime would take effect for estates of decedents dying and gifts and generationskipping transfers made after December 31, 2010.

The provisions relating to purported gifts and recognition of gain on transfers to 

nonresidents noncitizens would be effective for transfers made after December 31, 2010.
14

II. EXPAND AVAILABILITY OF ESTATE TAX

EXCLUSION FOR CONSERVATION EASEMENTS

Present Law

In general

An executor may elect to exclude from the taxable estate 40 percent of the value of any 

land subject to a qualified conservation easement, up to a maximum exclusion of $400,000 in 

2001 and $500,000 in 2002 and thereafter. The exclusion percentage is reduced by two 

percentage points for each percentage point (or fraction thereof) by which the value of the 

qualified conservation easement is less than 30 percent of the value of the land (determined 

without regard to the value of such easement and reduced by the value of any retained 

development right).

A qualified conservation easement is one that meets the following requirements: (1) the 

land is located within 25 miles of a metropolitan area (as defined by the Office of Management 

and Budget) or a national park or wilderness area, or within 10 miles of an Urban National Forest 

(as designated by the Forest Service of the U.S. Department of Agriculture); (2) the land has 

been owned by the decedent or a member of the decedent’s family at all times during the threeyear period ending on the date of the decedent’s death; and (3) a qualified conservation 

contribution of a qualified real property interest was granted by the decedent or a member of his 

or her family. For purposes of the provision, preservation of a historically important land area or 

a certified historic structure does not qualify as a conservation purposes.

In order to qualify for the exclusion, a qualifying easement must have been granted by the 

decedent, a member of the decedent’s family, the executor of the decedent’s estate, or the trustee 

of a trust holding the land, no later than the date of the election. To the extent that the value of 

such land is excluded from the taxable estate, the basis of such land acquired at death is a 

carryover basis (i.e., the basis is not stepped-up to its fair market value at death). Property 

financed with acquisition indebtedness is eligible for this provision only to the extent of the net 

equity in the property.

Retained development rights

The exclusion for land subject to a conservation easement does not apply to any 

development right retained by the donor in the conveyance of the conservation easement. An 

example of such a development right would be the right to extract minerals from the land. If 

such development rights exist, then the value of the conservation easement must be reduced by 

the value of any retained development right.

If the donor or holders of the development rights agree in writing to extinguish the 

development rights in the land, then the value of the easement need not be reduced by the 

development rights. In such case, those persons with an interest in the land must execute the 

agreement no later than the earlier of (1) two years after the date of the decedent’s death or (2) 

the date of the sale of such land subject to the conservation easement. If such agreement is not 

entered into within this time, then those with an interest in the land are personally liable for an 
15

additional tax, which is the amount of tax which would have been due on the retained 

development rights subject to the termination agreement.

Description of Proposal

The proposal would expand availability of qualified conservation easements by 

modifying the distance requirements. Under the proposal, the distance within which the land 

must be situated from a metropolitan area, national park, or wilderness area is increased from 25 

to 50 miles, and the distance from which the land must be situated form an Urban National 

Forest is increased from 10 to 25 miles. The proposal also would clarify that the date for 

determining easement compliance is the date on which the donation was made.

Effective date

The proposal would be effective for estates of decedents dying after December 31, 2000.
16

III. MODIFY GENERATION-SKIPPING TRANSFER TAX RULES

A. Deemed Allocation of the Generation-Skipping Transfer Tax Exemption

to Lifetime Transfers to Trusts that are not Direct Skips

Present Law

A GST tax generally is imposed on transfers, either directly or through a trust or similar 

arrangement, to a Askip person@ (i.e., a beneficiary in a generation more than one generation 

below that of the transferor). Transfers subject to the GST tax include direct skips, taxable 

terminations, and taxable distributions. An exemption of $1 million (indexed beginning in 1999) 

is provided for each person making generation-skipping transfers. The exemption may be 

allocated by a transferor (or his or her executor) to transferred property.

A direct skip is any transfer subject to estate or gift tax of an interest in property to a skip 

person. A skip person may be a natural person or certain trusts. All persons assigned to the 

second or more remote generation below the transferor are skip persons (e.g., grandchildren and 

great-grandchildren). Trusts are skip persons if (1) all interests in the trust are held by skip 

persons, or (2) no person holds an interest in the trust and at no time after the transfer may a 

distribution (including distributions and terminations) be made to a non-skip person.

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 such termination, a 

non-skip person has an interest in the property, or unless at no time after the termination may a 

distribution (including a distribution upon termination) be made from the trust to a skip person. 

A taxable distribution is a distribution from a trust to a skip person (other than a taxable 

termination or direct skip).

The tax rate on generation-skipping transfers is a flat rate of tax equal to the maximum 

estate and gift tax rate in effect at the time of the transfer (55 percent under present law) 

multiplied by the Ainclusion ratio.@ The inclusion ratio with respect to any property transferred in 

a generation-skipping transfer indicates the amount of AGST exemption@ allocated to a trust. The 

allocation of GST exemption reduces the 55-percent tax rate on a generation-skipping transfer.

If an individual makes a direct skip during his or her lifetime, any unused GST exemption 

is automatically allocated to a direct skip to the extent necessary to make the inclusion ratio for 

such property equal to zero. An individual may elect out of the automatic allocation for lifetime 

direct skips.
17

For lifetime transfers made to a trust that are not direct skips, the transferor must allocate 

GST exemption--the allocation is not automatic. If GST exemption is allocated on a timely-filed 

gift tax return, then the portion of the trust which is exempt from GST tax is based on the value 

of the property at the time of the transfer. If, however, the allocation is not made on a timelyfiled gift tax return, then the portion of the trust which is exempt from GST tax is based on the 

value of the property at the time the allocation of GST exemption was made.

Treas. Reg. 26.2632-1(d) further provides that any unused GST exemption, which has not 

been allocated to transfers made during an individual=s life, is automatically allocated on the due 

date for filing the decedent=s estate tax return. Unused GST exemption is allocated pro rata on 

the basis of the value of the property as finally determined for estate tax purposes, first to direct 

skips treated as occurring at the transferor=s death. The balance, if any, of unused GST 

exemption is allocated pro rata, on the basis of the estate tax value of the nonexempt portion of 

the trust property (or in the case of trusts that are not included in the gross estate, on the basis of 

the date of death value of the trust) to trusts with respect to which a taxable termination may 

occur or from which a taxable distribution may be made.

Description of Proposal

Under the proposal, GST tax exemption would be automatically allocated to transfers 

made during life that are Aindirect skips.@ An indirect skip would be any transfer of property 

(that is not a direct skip) subject to the gift tax that is made to a GST trust.

A GST trust would be defined as a trust that could have a generation-skipping transfer 

with respect to the transferor (e.g., a taxable termination or taxable distribution), unless:

• the trust instrument provides that more than 25 percent of the trust corpus must be 

distributed to or may be withdrawn by 1 or more individuals who are non-skip 

persons (a) before the date that the individual attains age 46, (b) on or before 1 or 

more dates specified in the trust instrument that will occur before the date that such 

individual attains age 46, or (c) upon the occurrence of an event that, in accordance 

with regulations prescribed by the Treasury Secretary, may reasonably be expected to 

occur before the date that such individual attains age 46;

• the trust instrument provides that more than 25 percent of the trust corpus must be 

distributed to or may be withdrawn by 1 or more individuals who are non-skip 

persons and who are living on the date of death of another person identified in the 

instrument (by name or by class) who is more than 10 years older than such 

individuals; the trust instrument provides that, if 1 or more individuals who are nonskip persons die on or before a date or event described in clause (1) or (2), more than 

25 percent of the trust corpus either must be distributed to the estate or estates of 1 or 

more of such individuals or is subject to a general power of appointment exercisable 

by 1 or more of such individuals;

• the trust is a trust any portion of which would be included in the gross estate of a nonskip person (other than the transferor) if such person died immediately after the 

transfer;
18

• the trust is a charitable lead annuity trust or a charitable remainder annuity trust or a 

charitable unitrust; or

• the trust is a trust with respect to which a deduction was allowed under section 2522 

for the amount of an interest in the form of the right to receive annual payments of a 

fixed percentage of the net fair market value of the trust property (determined yearly) 

and which is required to pay principal to a non-skip person if such person is alive 

when the yearly payments for which the deduction was allowed terminate.

If any individual makes an indirect skip during the individual=s lifetime, then any unused 

portion of such individual=s GST exemption would be allocated to the property transferred to the 

extent necessary to produce the lowest possible inclusion ratio for such property.

An individual would be able to elect not to have the automatic allocation rules apply to an 

indirect skip, and such elections would be deemed timely if filed on a timely-filed gift tax return 

for the calendar year in which the transfer was made or deemed to have been made or on such 

later date or dates as may be prescribed by the Treasury Secretary. An individual would be able 

to elect not to have the automatic allocation rules apply to any or all transfers made by such 

individual to a particular trust and may elect to treat any trust as a GST trust with respect to any 

or all transfers made by the individual to such trust, and such election may be made on a timelyfiled gift tax return for the calendar year for which the election is to become effective.

Effective Date

The proposal would apply to transfers subject to estate or gift tax made after December 

31, 2000, and to estate tax inclusion periods ending after December 31, 2000.
19

B. Retroactive Allocation of the Generation-Skipping Tax Exemption

Present Law

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 such termination, a 

non-skip person has an interest in the property, or unless at no time after the termination may a 

distribution (including a distribution upon termination) be made from the trust to a skip person. 

A taxable distribution is a distribution from a trust to a skip person (other than a taxable 

termination or direct skip). If a transferor allocates GST tax exemption to a trust prior to the 

taxable termination or taxable distribution, GST tax may be avoided.

A transferor likely will not allocate GST tax exemption to a trust that the transferor 

expects will benefit only non-skip persons. However, if a taxable termination occurs because, 

for example, the transferor=s child unexpectedly dies such that the trust terminates in favor of the 

transferor=s grandchild, and GST tax exemption had not been allocated to the trust, then GST tax 

would be due even if the transferor had unused GST tax exemption.

Description of Proposal

Under the proposal, GST tax exemption could be allocated retroactively when there is an 

unnatural order of death. If a lineal descendant of the transferor predeceases the transferor, then 

the transferor could allocate any unused GST exemption to any previous transfer or transfers to 

the trust on a chronological basis. The proposal would allow a transferor to retroactively allocate 

GST exemption to a trust where a beneficiary (a) is a non-skip person, (b) is a lineal descendant 

of the transferor=s grandparent or a grandparent of the transferor=s spouse, (c) is a generation 

younger than the generation of the transferor, and (d) dies before the transferor. Exemption 

would be allocated under this rule retroactively, and the applicable fraction and inclusion ratio 

would be determined based on the value of the property on the date that the property was 

transferred to trust.

Effective Date

The proposal would apply to deaths of non-skip persons occurring after December 31, 

2000.
20

C. Severing of Trusts Holding Property Having an

Inclusion Ratio of Greater than Zero

Present law

A generation-skipping transfer tax (AGST tax@) generally is imposed on transfers, either 

directly or through a trust or similar arrangement, to a Askip person@ (i.e., a beneficiary in a 

generation more than one generation below that of the transferor). Transfers subject to the GST 

tax include direct skips, taxable terminations, and taxable distributions. An exemption of $1 

million (indexed beginning in 1999) is provided for each person making generation-skipping 

transfers. The exemption may be allocated by a transferor (or his or her executor) to transferred 

property.

If the value of transferred property exceeds the amount of the GST exemption allocated 

to that property, then the GST tax generally is determined by multiplying a flat tax rate equal to 

the highest estate tax rate (which is currently 55 percent) by the Ainclusion ratio@ and the value of 

the taxable property at the time of the taxable event. The Ainclusion ratio@ is the number one 

minus the Aapplicable fraction.@ The applicable fraction is a fraction calculated by dividing the 

amount of the GST exemption allocated to the property by the value of the property.

Under Treas. Reg. 26.2654-1(b), a trust may be severed into two or more trusts (e.g., one 

with an inclusion ratio of zero and one with an inclusion ratio of one) only if (1) the trust is 

severed according to a direction in the governing instrument or (2) the trust is severed pursuant 

to the trustee=s discretionary powers, but only if certain other conditions are satisfied (e.g., the 

severance occurs or a reformation proceeding begins before the estate tax return is due). Under 

current Treasury regulations, however, a trustee cannot establish inclusion ratios of zero and one 

by severing a trust that is subject to the GST tax after the trust has been created.

Description of Proposal

Under the proposal, a trust could be severed in a Aqualified severance.@ A qualified 

severance would be defined as the division of a single trust and the creation of two or more trusts 

if (1) the single trust was divided on a fractional basis, and (2) the terms of the new trusts, in the 

aggregate, provide for the same succession of interests of beneficiaries as are provided in the 

original trust. If a trust has an inclusion ratio of greater than zero and less than one, a severance 

would be a qualified severance only if the single trust is divided into two trusts, one of which 

receives a fractional share of the total value of all trust assets equal to the applicable fraction of 

the single trust immediately before the severance. In such case, the trust receiving such 

fractional share would have an inclusion ratio of zero and the other trust shall have an inclusion 

ratio of one. Under the provision, a trustee may elect to sever a trust in a qualified severance at 

any time.

Effective Date

The provision would be effective for severances of trusts occurring after December 31, 

2000.
21

D. Modification of Certain Valuation Rules

Present Law

Under present law, the inclusion ratio is determined using gift tax values for allocations 

of GST tax exemption made on timely filed gift tax returns. The inclusion ratio generally is 

determined using estate tax values for allocations of GST tax exemption made to transfers at 

death. Treas. Reg. 26.2642-5(b) provides that, with respect to taxable terminations and taxable 

distributions, the inclusion ratio becomes final on the later of the period of assessment with 

respect to the first transfer using the inclusion ratio or the period for assessing the estate tax with 

respect to the transferor=s estate.

Description of Proposal

Under the proposal, in connection with timely and automatic allocations of GST tax 

exemption, the value of the property for purposes of determining the inclusion ratio would be its 

finally determined gift tax value or estate tax value depending on the circumstances of the 

transfer. In the case of a GST tax exemption allocation deemed to be made at the conclusion of 

an estate tax inclusion period, the value for purposes of determining the inclusion ratio would be 

its value at that time.

Effective Date

The proposal would be effective for transfers subject to estate or gift tax made after 

December 31, 2000.
22

E. Relief from Late Elections

Present Law

Under present law, an election to allocate GST tax exemption to a specific transfer may 

be made at any time up to the time for filing the transferor=s estate tax return. If an allocation is 

made on a gift tax return filed timely with respect to the transfer to trust, then the value on the 

date of transfer to the trust is used for determining GST tax exemption allocation. However, if 

the allocation relating to a specific transfer is not made on a timely-filed gift tax return, then the 

value on the date of allocation must be used. There is no statutory provision allowing relief for 

an inadvertent failure to make an election on a timely-filed gift tax return to allocate GST tax 

exemption.

Description of Proposal

Under the proposal, the Treasury Secretary would be authorized and directed to grant 

extensions of time to make the election to allocate GST tax exemption and to grant exceptions to 

the time requirement. If such relief were granted, then the value on the date of transfer to trust 

would be used for determining GST tax exemption allocation.

In determining whether to grant relief for late elections, the Treasury Secretary is directed 

to consider all relevant circumstances, including evidence of intent contained in the trust 

instrument or instrument of transfer and such other factors as the Treasury Secretary deems 

relevant. For purposes of determining whether to grant relief, the time for making the allocation 

(or election) is treated as if not expressly prescribed by statute.

Effective Date

The proposal would apply to transfers subject to estate or gift tax made after December 

31, 2000.
23

F. Substantial Compliance

Present Law

Under present law, there is no statutory rule which provides that substantial compliance 

with the statutory and regulatory requirements for allocating GST tax exemption will suffice to 

establish that GST tax exemption was allocated to a particular transfer or trust.

Description of Proposal

Under the proposal, substantial compliance with the statutory and regulatory 

requirements for allocating GST tax exemption would suffice to establish that GST tax 

exemption was allocated to a particular transfer or a particular trust. If a taxpayers demonstrates 

substantial compliance, then so much of the transferor=s unused GST tax exemption would be 

allocated to the extent it produces the lowest possible inclusion ratio. In determining whether 

there has been substantial compliance, all relevant circumstances would be considered, including 

evidence of intent contained in the trust instrument or instrument of transfer and such other 

factors as the Treasury Secretary deems appropriate.

Effective Date

This proposal would apply to transfers subject to estate or gift tax made after December 

31, 2000.
24

IV. EXPAND AVAILABILITY OF INSTALLMENT PAYMENT

OF ESTATE TAX FOR ESTATES OF DECEDENTS WITH

AN INTEREST IN A CLOSELY-HELD BUSINESSES

Present Law

Under present law, the estate tax generally is due within nine months of a decedent’s 

death. However, an executor generally may elect to pay estate tax attributable to an interest in a 

closely-held business in 2 or more installments (but no more than 10). An estate is eligible for 

payment of estate tax in installments if the value of the decedent’s interest in a closely-held 

business exceeds 35 percent of the decedent’s adjusted gross estate (i.e., the gross estate less 

certain deductions). If the election is made, the estate pays only interest for the first five years, 

followed by up to 10 annual installments of principal and interest. This provision effectively 

extends the time for paying estate tax by 14 years from the original due date of the estate tax.3 A 

special two-percent interest rate applies to the amount of deferred estate tax attributable to the 

first $1 million (adjusted annually for inflation occurring after 1998) in taxable value of a 

closely-held business. The interest rate applicable to the amount of estate tax attributable to the 

taxable value of the closely-held business in excess of $1 million is equal to 45 percent of the 

rate applicable to underpayments of tax under section 6621 (i.e., 45 percent of the Federal shortterm rate plus 3 percentage points). Interest paid on deferred estate taxes is not deductible for 

estate or income tax purposes.

For purposes of these rules, an interest in a closely-held business is: (1) an interest as a 

proprietor in a sole proprietorship, (2) an interest as a partner in a partnership carrying on a trade 

or business if 20 percent or more of the total capital interest of such partnership is included in the 

decedent’s gross estate or the partnership had 15 or fewer partners, and (3) stock in a corporation 

carrying on a trade or business if 20 percent or more of the value of the voting stock of the 

corporation is included in the decedent’s gross estate or such corporation had 15 or fewer 

shareholders. 

If more than 50 percent of the value of the closely-held business is distributed, sold, 

exchanged, or otherwise disposed of, then the extension of time for the payment of tax generally 

no longer applies, and the unpaid portion of the tax payable in installments must be paid upon 

notice and demand from the Treasury Secretary.

Description of Proposal

Under the proposal, the definition of a closely-held business would be expanded. The 

proposal would increase from 15 to 45 the maximum number of partners in a partnership and 

shareholders in a corporation that could be considered an entity in which a decedent held an 

 

3

 For example, assume estate tax is due in 2001. If interest only is paid each year for the 

first five years (2001 through 2005), and if 10 installments of both principal and interest are paid 

for the 10 years thereafter (2006 through 2015), then payment of estate tax would be extended by 

14 years from the original due date of 2001.
25

interest in a closely-held business and thus qualify the estate for installment payment of estate 

tax.

Effective Date

The proposal would be effective for decedents dying after December 31, 2001.