DESCRIPTION AND ANALYSIS OF PRESENT LAW 

AND PROPOSALS RELATING TO 

FEDERAL ESTATE AND GIFT TAXATION

Scheduled for a Public Hearing

Before the

SUBCOMMITTEE ON TAXATION AND IRS OVERSIGHT

of the

SENATE COMMITTEE ON FINANCE

on March 15, 2001

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

March 14, 2001

JCX-14-01
i

CONTENTS

Page

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

I. PRESENT LAW AND LEGISLATIVE HISTORY............................................... 2

A. Present Law.......................................................................................................... 2

 1. Application of the estate and gift tax............................................................... 2

2. Unified credit.................................................................................................. 2

3. Transfers to a surviving spouse ...................................................................... 3

 4. Annual exclusion for gifts............................................................................... 3

 5. Basis of property received ............................................................................. 3

 6. Valuation ........................................................................................................ 4

 7. Qualified family-owned businesses interests.................................................. 5

 8. Exclusion for land subject to a permanent conservation easement.................. 6

9. Generation-skipping transfer tax..................................................................... 7

10. Installment payment of estate tax for closely-held businesses......................... 8

11. State death tax credit....................................................................................... 9

12. Transfers to certain foreign trusts and estates................................................. 10

13. Federal estate and income tax treatment of life insurance............................... 10

B. Legislative History............................................................................................... 10

1. Federal death taxes before World War I......................................................... 10

2. Estate taxes from World War I through World War II .................................... 11

3. Estate and gift taxes after World War II.......................................................... 13

4. 1999 and subsequent legislation..................................................................... 17

5. Summary......................................................................................................... 18

II. BACKGROUND DATA AND ANALYSIS RELATING TO ESTATE AND

GIFT TAXATION.................................................................................................... 20

A. Background Data .................................................................................................. 20

B. Comparison of Transfer Taxation in the United States and Other Countries......... 26

C. Economic Issues Related to Transfer Taxation..................................................... 30

III. DESCRIPTION OF PROPOSALS ...................................................................... 42

A. The Presidents’s Fiscal 2002 Budget ................................................................... 42

B. S. 9 the “Working Family Tax Relief Act of 2001”.............................................. 42
Page

ii

C. S. 31, the “Estate and Gift Tax Rate Reduction Act of 2001”............................... 42

D. S. 35, the “Tax Cut With a Purpose Act of 2001”................................................. 43

E. S. 82, the “Estate and Gift Tax Repeal Act of 2001”............................................ 43

F. S. 83, the “Estate and Gift Tax Phase-Out Act of 2001”....................................... 43

G. S. 84, the “Farmer and Entrepreneur Estate Tax Relief Act of 2001”................... 43

H. S. 100, the “Death Tax Termination Act of 2001”................................................ 44

I. S. 179 ................................................................................................................... 44

J. S. 275, the “Estate Tax Elimination Act of 2001” ................................................ 45
1

INTRODUCTION

The Senate Committee on Finance has scheduled a public hearing on March 15, 2001, on 

estate and gift taxes. The hearing will address proposals relating to estate and gift taxes. This 

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

present law (Part I), background and economic analysis of estate and gift taxation (Part II), and a 

description of proposals relating to estate and gift taxation (Part III).

 

1

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

Analysis of Present Law and Proposals Relating to Federal Estate and Gift Taxation (JCX-14-

01), March 14, 2001.
2

I. PRESENT LAW AND LEGISLATIVE HISTORY

A. Present Law

1. Application of the estate and gift tax

A gift tax is imposed on lifetime transfers and an estate tax is imposed on transfers at 

death. Since 1976, the gift tax and the estate tax have been 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.2 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.3 In addition, a 5-percent surtax is imposed on cumulative taxable transfers between $10 

million and the amount necessary to phase out the benefits of the graduated rates.4

The amount of gift tax payable for any calendar year generally is determined by (1) 

multiplying the applicable tax rate (from the unified graduated rate schedule) by the cumulative 

lifetime taxable transfers made by the taxpayer and (2) subtracting any gift taxes payable for 

prior taxable periods. This amount is reduced by any available unified credit (and other 

applicable credits) to determine the gift tax liability for the taxable period.

The amount of estate tax payable generally is determined by (1) multiplying the 

applicable tax rate (from the unified graduated rate schedule) by the cumulative post-1976 

taxable transfers made by the taxpayer during his or her lifetime or at death and then (2) 

subtracting any gift taxes payable for prior calendar years (after 1976). This amount is reduced 

by any available unified credit (and other applicable credits) to determine the estate tax liability.

2. Unified credit

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

1987 to 1997, the unified credit was $192,800, which effectively exempted from estate and gift 

tax a total of $600,000 in cumulative taxable transfers. The Taxpayer Relief Act of 1997 (the 

“1997 Act”)5 increased the effective exemption to $625,000 in 1998, $650,000 in 1999, 

 

2

 Prior to 1976, separate tax rate schedules applied to the gift tax and estate tax.

3

 The unified credit operates to effectively exempt from estate and gift tax the first 

$675,000 of cumulative taxable transfers in 2001. For transfers in excess of $675,000, estate and 

gift tax rates begin to apply at 37 percent. The effective exemption is scheduled to increase to $1 

million in 2006 and thereafter. (See discussion of unified credit at A. 2 below.)

4

 In order to phase out the benefit of the graduated rates, the 5-percent surtax is applies to 

taxable transfers between $10 million and $17,184,000. Thus, estates between $10 million and 

$17,184,000 are subject to a top marginal rate of 60 percent. Taxable transfers over $17,184,000 

are subject to a top marginal rate of 55 percent, as the benefit of the graduated rate has been 

phased out.

5

 P.L. 105-34 (August 5, 1997).
3

$675,000 in 2000 and 2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in 2005, 

and $1 million in 2006 and thereafter.

3. 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 the 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.

4. Annual exclusion for gifts

A taxpayer may exclude $10,000 of gifts made to any one donee during a calendar year. 

The $10,000 exclusion is adjusted annually for inflation occurring after 1997. For 2001, the 

inflation-adjusted amount remains at $10,000.6 This annual exclusion does not apply to gifts of 

future interests (e.g., reversions or remainders). Married individuals may treat gifts made to any 

one donee as having been made one-half by such the donor and one-half by his or her spouse. 

This provision effectively allows a married couple to exclude $20,000 of gifts made to any one 

donee during a calendar year.

5. Basis of property received

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. From the time property is 

acquired, basis may be adjusted over time. An example of an adjustment that would increase 

basis would include the cost of capital improvements made to property. An adjustment that 

would decrease basis would, for example, be depreciation deductions taken with respect to the 

property.

Under present law, 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. (Sec. 1015.)

 

6

 Rev. Proc. 2001-13.
4

Under present law, property received from a decedent’s estate generally takes a stepped 

up basis. “Stepped up basis” for estate tax purposes means that the basis in the hands of the 

beneficiary generally is the fair market value on the date of the decedent’s death. (Sec. 1014.)

6. Valuation

In general

For Federal estate and gift tax purposes, the value of property generally is its fair market 

value, i.e., the price at which the property would change hands between a willing buyer and a 

willing seller, neither being under any compulsion to buy or sell and both having reasonable 

knowledge of relevant facts. For Federal estate tax purposes, fair market value is determined at 

either (1) the time of the decedent’s death, or (2) the “alternate valuation date,” which is six 

months after the decedent’s death. For federal gift tax purposes, fair market value generally is 

determined on the date the gift is made.

Special-use valuation

Under Code section 2032A, 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 which is based on the property’s highest 

and best use. Currently, the maximum “special-use valuation” reduction in value for such real 

property resulting from an election under section 2032A is $750,000. The $750,000 maximum 

reduction in value is adjusted annually for inflation occurring after 1997. For 2001, the inflationadjusted maximum special-use valuation reduction is $800,000.7

An estate may qualify for special-use valuation under section 2032A if:

• the decedent was a citizen or resident of the United States at the time of death;

• at least 50 percent of the adjusted value of the decedent’s gross estate consists of the 

farm or closely-held business assets in the decedent’s estate, including both real and 

personal property (but reduced by debts attributable to the real and personal 

property);

• at least 25 percent of the adjusted value of the gross estate is qualified farm or 

closely-held business real property, which was used by the decedent or a member of 

the decedent’s family for 5 of the 8 years leading up to the date of the decedent’s 

death;8

 

7

 Rev. Proc. 2001-13.

8

 For purposes of the 50-percent and 25-percent tests, the value of the property is 

determined without regard to its current-use value.
5

• the real property qualifying for current-use valuation passes to a qualified heir;9 and

• such real property was owned by the decedent or a member of the decedent’s family 

and used or held for use as a farm or closely-held business (a “qualified use”) for 5 of 

the 8 years immediately preceding the decedent’s death.

If, after an election is made to value property at its current-use value, 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 estate-tax benefit of the 

current-use valuation. For purposes of the special-use valuation provisions, the contribution of a 

qualified conservation easement is not considered a disposition that would trigger recapture of 

estate tax. In addition, recipients of property for which special-use valuation was elected take a 

basis equal to the property’s special-use value, rather than its fair market value.

7. Qualified family-owned business interests

An estate is permitted to deduct the adjusted value of the qualified family-owned 

business interests of the decedent, up to a total of $675,000. 

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 exemption amount is $625,000, for a total of $1.3 million. If the qualified 

family-owned business deduction is less $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.

A qualified family-owned 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 one 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 (as defined in sec. 543). In the case of a trade or business that 

owns an interest in another trade or 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.

 

9

 The term “qualified heir” means a member of the decedent’s family, which includes his 

or her spouse, his or her lineal descendants, his or her spouse’s lineal descendants, or the spouse 

of any lineal descendant.
6

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, each qualified heir (or member of the 

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

years following the decedent’s death.

The benefit of the deduction for qualified family-owned business interests is subject to 

recapture if, within 10 years of the decedent’s death and before the qualified heir’s death, one of 

the following recapture events occurs:

• the qualified heir ceases to meet the material participation requirements;

• the qualified heir disposes of any portion of his or her interest in the family-owned 

business, other than generally by a disposition to a member of the qualified heir’s 

family or through a qualified conservation contribution;

• the principal place of business of the trade or business ceases to be located within the 

United States; or

• the qualified heir loses U.S. citizenship.

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: seven years after the 

decedent’s death, 80 percent; eight years after the decedent’s death, 60 percent, nine years after 

the decedent’s death, 40 percent, and 10 years 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.

8. Exclusion for land subject to a permanent conservation easement

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. If the value of the conservation easement is less than 
7

30 percent of the value of the land without the easement (reduced by the value of any retained 

development rights), then 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.

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

• 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);

• the land has been owned by the decedent or a member of the decedent’s family at all 

times during the three-year period ending on the date of the decedent’s death; and

• a qualified conservation contribution (within the meaning of sec. 170(h)) of a 

qualified real property interest (as generally defined in sec. 170(h)(2)(C)) was granted 

by the decedent or a member of his or her family. For purposes of this provision, 

preservation of a historically important land area or certified historic structure does 

not qualify as a conservation purpose.

In order to qualify a conservation easement for the exclusion, the 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 the same as it was in the hands of the 

decedent and 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. The exclusion from estate taxes does not extend to the value of any development rights 

retained by the decedent or donor.

For purposes of the special-use valuation provisions or qualified family-owned business 

deduction, the contribution of a qualified conservation easement is not considered a disposition 

that would trigger recapture of estate tax.

9. 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.” A “direct skip” is a transfer of an interest in property 

to a skip person (e.g., a transfer from grandparent to grandchild). 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 
8

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 generation-skipping transfer tax is imposed at a flat rate of 55 percent on cumulative 

generation-skipping transfers in excess of $1 million. The $1 million generation-skipping 

transfer tax exemption is adjusted annually for inflation occurring after 1998. For 2001, the 

generation-skipping transfer tax exemption is $1,060,000.10 Because both the generationskipping transfer tax and the estate or gift tax can apply to the same transfer, the combined 

marginal tax rate on a generation-skipping transfer can reach nearly 80 percent.

A $10,000 annual exemption also is provided for transfers that are “direct skips.” In 

general, if an outright gift is not subject to gift tax because of application of the gift tax annual 

exclusion, then it will not be subject to generation-skipping transfer tax. In addition, the annual 

exemption for “direct skips” also applies to certain transfers to trusts, if the trust is for the 

exclusive benefit of one beneficiary and the trust’s corpus would be included in the beneficiaries 

gross estate if the beneficiary were to die before the termination of the trust.

10. Installment payment of estate tax for closely-held businesses

In general, the estate tax 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). 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.11 A special two-percent interest rate applies to the amount of deferred 

estate tax attributable to the first $1 million in taxable value of a closely-held business. Value for 

purposes of installment payment of estate tax would include a property’s special-use value, if the 

benefits of that provision are claimed. The $1 million threshold is adjusted annually for inflation 

occurring after 1998. For 2001, the threshold is $1,060,000. 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 short-term rate plus 3 percentage points). Interest paid on 

deferred estate taxes is not deductible for estate or income tax purposes.

To qualify for the installment payment election, the decedent must have been a citizen or 

resident of the United States and the decedent’s interest in the closely-held business must exceed 

35 percent of the decedent’s adjusted gross estate. An interest in a closely-held business 

includes:

 

10 Rev. Proc. 2001-13.

11 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.
9

• any interest as a proprietor in a business carried on as a proprietorship;

• any interest in a partnership carrying on a trade or business if the partnership has 15 

or fewer partners or if at least 20 percent of the partnership’s assets are included in 

determining the decedent’s gross estate; and

• stock in a corporation if the corporation has 15 or fewer shareholders, or if at least 20 

percent of the value of the voting stock is included in determining the decedent’s 

gross estate.

In general, the installment payment election is available only if the estate directly owns 

an interest in a closely-held active trade or business. Under a special rule, however, an executor 

may elect to look through certain non-publicly traded holding companies that own stock in a 

closely-held active trade or business, but if the election is made, neither the five-year deferral 

(which provides that only interest payments, are required during the first five years) nor the 

special two-percent interest rate on the first $1 million of taxable estate applies.

If the installment payment election is made, a special estate tax lien applies to any 

property on which tax is deferred for the installment payment period.

In addition, if more than 50 percent of the value of the closely-held business is 

distributed, sold, exchanged, or otherwise disposed of, then, in general, the extension of time for 

the payment of tax no longer applies, and the unpaid portion of the tax payable in installments 

must be paid upon notice and demand from the Treasury Secretary. An exception to this rule is 

provided for transfers of property to a person entitled to receive the decedent’s property under 

the decedent’s will, the applicable State law, or a trust created by the decedent. Moreover, a 

similar exception applies in the case of a series of subsequent transfers of the property by reason 

of death so long as each transfer is to a member of the decedent’s family, which includes the 

decedent’s brothers and sisters (whether by the whole or half blood), spouse, ancestors, and 

lineal descendants.

11. State death tax12 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 

 

12 The term “death tax” is used to refer to any tax that is imposed at the time of the death 

of an individual. As used herein, this term includes inheritance taxes and estate taxes. An 

“inheritance” tax is a tax on the right to receive property at death from an individual and 

generally is measured by the amount that a particular legatee receives from the decedent. An 

“estate” tax is a tax on the right to transfer property at death and generally is measured by the 

total amount passing at the time of the decedent’s death. Historically, inheritance taxes were 

imposed by States, while estate taxes were imposed by the Federal Government.
10

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 Federal state death tax credit. This provides states with the maximum 

amount of death tax that for which the Federal state death tax credit provides.

12. 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.

13. Federal estate and income tax treatment of life insurance

For Federal estate tax purposes, the proceeds of life insurance on the life of a decedent 

generally are included in the decedent’s gross estate. Moreover, proceeds of life insurance are 

included in a decedent’s gross estate to the extent he or she possessed at death any of the 

incidents of ownership exercisable alone or in conjunction with any other person. (Sec. 2042.)

No Federal income tax generally is imposed on earnings under a life insurance contract 

("inside buildup"). Further, no Federal income tax is imposed on amounts received under a life 

insurance contract paid by reason of the death of the insured. This favorable tax treatment is 

available only if the policyholder or owner has an insurable interest in the insured when the 

contract is issued and if the life insurance contract meets certain requirements designed to limit 

the investment character of the contract. Distributions from a life insurance contract (other than 

a modified endowment contract) that are made prior to the death of the insured generally are 

includible in income, to the extent that the amounts distributed exceed the taxpayer's investment 

in the contract; such distributions generally are treated first as a tax-free recovery of the 

investment in the contract, and then as income. In the case of a modified endowment contract, 

however, in general, distributions are treated as income first, loans are treated as distributions 

(i.e., income rather than basis recovery first), and an additional 10-percent tax is imposed on the 

income portion of distributions made before age 59-1/2 and in certain other circumstances. A 

modified endowment contract is a life insurance contract that does not meet a statutory "7-pay" 

test, i.e., generally is funded more rapidly than 7 annual level premiums. Certain amounts 

received under a life insurance contract on the life of a terminally or chronically ill individual, 

and certain amounts paid for the sale or assignment to a viatical settlement provider of a life 

insurance contract on the life of a terminally ill or chronically ill individual, are treated as 

excludable as if paid by reason of the death of the insured.

B. Legislative History

1. Federal death taxes before World War I

While States extensively used death taxes, Federal death taxes in the United States, for 

most of its history, were imposed primarily to finance wars or the threat of war. The first Federal 

death tax was imposed from 1797 until 1802 as a stamp tax on inventories of deceased persons, 
11

receipts of legacies, shares of personal estate, probates of wills, and letters of administration to 

pay for the development of strong naval forces felt necessary because of strained trade relations 

with France.13 After repeal of the stamp tax,14 there were no death taxes imposed by the Federal 

Government until the Civil War, when the Federal Government imposed an inheritance tax 

between 1862 and 1870.15 In order to finance the Spanish-American War, the Federal 

Government imposed its first estate tax in 1898, which remained in effect until its repeal in 

1902.16 While prior death taxes were primarily imposed to finance warfare, President Theodore 

Roosevelt proposed, in 1906, a progressive tax on all lifetime gifts and death time bequests to 

limit the amount that one individual could transfer to another, although no legislation 

immediately resulted from such proposal.17

2. Estate taxes from World War I through World War II

Estate taxes to finance World War I

The commencement of World War I caused revenues from tariffs to fall. The Federal 

Government in 191618 adopted a progressive estate tax on all property owned by the decedent at 

his or her death, certain lifetime transfers which were for inadequate consideration,19 transfers 

not intended to take effect until death,20 and transfers made in contemplation of death.

The 1916 estate tax provided an exemption (in the form of a deduction) of $50,000 with 

rates from 1 percent on the first $50,000 of transferred assets to 10 percent on transferred assets 

in excess of $5 million. The next year, the revenue needs from the War resulted in increases in 

estate tax rates with a top rate of 25 percent on transferred assets in excess of $10 million.21

 

13 Act of July 6, 1797, 1 Stat. 527.

14 Act of June 30, 1802, 2 Stat. 148.

15 Act of July 1, 1862, 12 Stat. 432, 483; Act of July 15, 1870, 16 Stat. 256.

16 War Revenue Act of 1898, 30 Stat. 448, 464 (July 4, 1898).

17 See quotation in Paul, Randolph E., Taxation in the United States, p. 88 (Boston 

1954).

18 Act of September 8, 1916, 39 Stat. 756.

19 This rule is contained in Code section 2043 of present law.

20 This rule is contained in Code section 2037 of present law.

21 Act of March 3, 1917, 39 Stat. 1000.
12

Estate and gift taxes between World Wars I and II

In the Revenue Act of 1918, estate tax rates on transfers under $1 million were reduced, 

but the tax was extended to life insurance proceeds in excess of $40,000 that were receivable by 

the estate or its executor and property subject to a general power of appointment.22

In 1924, the estate tax was changed by: (1) increasing the maximum rate to 40 percent; 

(2) broadening property subject to the tax to include jointly-owned property and property subject 

to a power retained by the decedent to alter, amend, or revoke the beneficial enjoyment of the 

property;23 and (3) allowing a credit for State death taxes of up to 25 percent of the Federal tax. 

In addition, the first gift tax was imposed.

In 1926, the gift tax was repealed and estate tax rates were reduced to a maximum rate of 

20 percent on transfers over $10 million. The exemption was increased from $50,000 to 

$100,000, and the credit for State death taxes was increased to 80 percent of the Federal tax.24

In 1932, with the advent of the Depression, revenues from other sources were declining, 

and the need for new revenues for Government projects increased. As a result, estate tax rates 

were increased, with a top rate of 45 percent on transfers over $10 million.25 The tax was made 

applicable to lifetime transfers in which the transferor retained a life estate or the power to 

control who shall benefit from the property or income therefrom. 26 The exemption was reduced 

to $50,000, and the Federal gift tax was reimposed (at 75 percent of the estate tax rates) for 

cumulative lifetime gifts in excess of $5,000 per year.

Estate and gift tax rates were increased in 1934 with top rates of 60 percent and 45 

percent, respectively, on transfers in excess of $10 million and again in 1935 with top rates of 70 

percent and 52.5 percent, respectively, on transfers in excess of $50 million.27 The exemption 

for both the estate and gift tax was reduced in 1935 to $40,000 each.28

In 1940, a 10-percent surcharge was imposed on both income and estate and gift taxes, in 

light of the need for additional revenue necessitated by the military build-up just prior to World 

 

22 These rules are now contained in sections 2041 and 2514 of present law.

23 This rule is now contained in section 2038 of present law.

24 This rule is now contained in section 2011 of present law. The size of the credit has 

not changed even though the Federal estate tax rates subsequently have been changed several 

times.

25 Revenue Act of 1932, 47 Stat. 169 (June 6, 1932).

26 This rule is now contained in section 2036(a) of present law.

27 Act of May 10, 1934, 48 Stat. 680.

28 Act of August 30, 1935, 49 Stat. 1014.
13

War II.29 Estate and gift tax rates were increased in 1941, with a top estate tax rate of 77 percent 

on transfers in excess of $50 million.30

Estate and gift taxes during World War II

In 1942, Congress again altered estate and gift taxes by: (1) setting the exemption from 

the estate tax at $60,000, the lifetime exemption from gift tax at $30,000, and providing an 

annual gift tax exclusion of $3,000;31 and (2) attempting to equate property in community 

property States with property owned in non-community property States by providing that in both 

community property States and non-community property States, each spouse would be taxed on 

the portion of jointly-owned or community property that each spouse contributed to that 

property’s acquisition cost.32

3. Estate and gift taxes after World War II

Post-World War II through 1975

The 1942 solution to the community property problem was viewed as complex. Congress 

provided a different solution in 1948 for equating community property States and noncommunity property States by providing the decedent or donor spouse a marital deduction for 50 

percent of the property transferred to the other spouse, and, thus, effectively allowing both 

spouses to be taxed on one-half of the property’s value.33

In 1954, the estate tax treatment of life insurance was changed. Under a new rule, life 

insurance was subject to estate tax if the proceeds were paid to the decedent’s estate or executor 

or if the decedent retained “incidents of ownership” in the life insurance policy.34

The Small Business Tax Revision Act of 195835 provided for payment of Federal estate 

tax on certain closely-held businesses in installments over a 10-year period.36

 

29 Revenue Act of 1940, 54 Stat. 516.

30 Act of September 20, 1941, 55 Stat. 687.

31 The $60,000 deathtime and the $30,000 lifetime exemptions remained at these levels 

until the Tax Reform Act of 1976, when the estate and gift taxes were combined into a single 

unified tax that could be reduced by a unified credit which replaced the two exemptions.

32 Act of October 21, 1942, 56 Stat. 798.

33 Revenue Act of 1948, 62 Stat. 110.

34 This rule is now contained in section 2042 of present law.

35 P.L. 85-866 (September 2, 1958).
14

Legislation from 1976 through 1980

In the Tax Reform Act of 1976,37 Congress substantially revised estate and gift taxes by:

• providing for a single unified rate structure for cumulative lifetime and deathtime 

transfers;38

• providing an exemption in the form of a credit (called the “unified credit”), which 

effectively exempted $175,625 of transfers from tax when fully phased in;

• revising and lowering the unified rate structure such that the maximum rate of tax was 

70 percent;

• changing the income tax rules applicable to the disposition of inherited assets from a

rule that only taxed post-death appreciation (i.e., the basis in the hands of the heir was 

“stepped up” to its value on the date of the decedent’s death) to one that provided that 

the heir’s basis generally would be the same as it was in the hands of the decedent 

(i.e., the decedent’s basis in the property would “carryover” to be the basis to the 

heir);

• providing a 100-percent marital deduction for the first $250,000 of property 

transferred to a surviving spouse;

• changing the treatment of gifts made in contemplation of death from a rebuttable 

presumption that gifts made within three years of death would be subject to estate tax 

to a rule that subjects all gifts made within three years of death to the estate tax;39

• providing that each spouse was rebuttably presumed to have contributed equally to 

the acquisition cost of jointly-held property;

• providing that a farm or other real property used in a closely-held business could be 

valued at its current-use value rather than its highest and best use value, so long as the 

heirs continue to use the property for 15 years after the decedent’s death;40

 

36 This rule has been subsequently modified; it is now contained in section 6166 of 

present law.

37 P.L. 94-455 (October 4, 1976).

38 These rules are now contained in sections 2001 and 2501 of present law.

39 This rule is now contained in section 2035 of present law.

40 These “special-use valuation” rules are now contained in section 2032A of present law, 

and the rules now require the heirs to continue to use the property for only 10 years after the 

decedent’s death.
15

• providing a limited deduction for bequests to children with no living parents (the socalled “orphan’s deduction”);

• providing a new transfer tax on generation-skipping transfers basically equal to the 

additional estate or gift tax that the decedent’s children would have paid if the 

property had passed directly to the children instead of skipping that generation and 

passing to, for example, a donor’s or decedent’s grandchildren;

• providing statutory rules governing the disclaimer of gifts and bequests under which 

an unqualified, irrevocable refusal to accept any benefits from the gift or bequest 

generally within 9 months of the creation of the transferee’s interest is not treated as a 

gift by the disclaiming individual;41 and

• liberalizing the provision that permits installment payment of estate tax on closelyheld businesses by providing that only interest need be paid for the first four years 

after death and by lengthening the period of installment by an additional four years.

In 1980, the estate tax “carryover basis” rules were retroactively repealed, and the estate 

tax “step-up basis” rules were reinstated.42

Legislation from 1981 through 1985

The Economic Recovery Act of 1981 (the “1981 Act”)43 changed the estate and gift tax 

rules by:

• increasing the unified credit such that, when fully phased in 1987, it effectively 

exempted the first $600,000 of transfers from the unified estate and gift tax;

• reducing the top unified estate and gift tax rate from 70 percent to 50 percent over a 

four-year period (1982 through 1985);

• providing for an unlimited deduction for transfers to spouses and permitted such a 

deduction even when the donee spouse could not control the disposition of the 

property after that spouse’s death, so long as the spouse had an income interest in the 

property and that property was subject to that spouse’s estate and gift tax (referred to 

as “qualified terminable interest property”);44

 

41 This rule is now contained in section 2518 of present law.

42 Crude Oil Windfall Profits Act of 1980 (P.L. 96-223 (April 2, 1980)).

43 P.L. 97-35 (August 13, 1981).

44 This rule is now contained in section 2056 of present law.
16

• increasing the annual gift tax exemption from $3,000 per year per donee to $10,000 

per year per donee;

• changing the presumption that each spouse equally provided for the acquisition cost 

of jointly-held property to an irrebuttable presumption;

• modifying the special-use valuation rules by shortening to 10 years the period that 

heirs who inherit farms or other real property used in a closely-held business were 

required to so use the property, and by increasing the maximum reduction in value of 

such property from $500,000 to $750,000;

• repealing the so-called “orphan’s deduction”;

• delaying the effective date of the generation-skipping transfer tax; and

• further liberalizing and simplifying the rules that permit the installment payment of 

estate tax on closely-held businesses.

The Deficit Reduction Act of 1984 modified the estate and gift tax rules by:

• delaying for three years the scheduled reduction of the maximum estate and gift tax 

rates (such that the maximum rate remained at 55 percent until 1988);

• eliminating the exclusion for interests in qualified pension plans;

• providing rules for the gift and income tax treatment of below-market rate loans; and

• extending the rules which permit the installment payment of estate taxes on closelyheld businesses to certain holding companies.

Legislation from 1986 through 1997

The Tax Reform Act of 198645 substantially revised the tax on generation-skipping 

transfers by applying a single rate of tax equal to the highest estate tax rate (i.e., 55 percent) to all 

generation-skipping transfers in excess of $1 million and by broadening the definition of a 

generation-skipping transfer to include direct transfers from a grandparent to a grandchild (i.e., 

direct skips).

The Omnibus Budget Reconciliation Act of 198746 modified the estate and gift tax by: 

(1) providing special rules for so-called “estate freeze transaction,” through which the estate of a 

 

45 P.L. 99-514 (October 22, 1986). The generation-skipping transfer tax rules added by 

the Tax Reform Act of 1986 are contained in sections 2601 through 2654 of present law.

46 P.L. 100-203.
17

person who engaged in such a transaction would be subject to estate tax on the entire value of 

such property; (2) providing a higher estate or gift tax rate on transfers in excess of $10 million 

in order to phase out the benefit of the graduated rates under 55 percent and the benefit of the 

unified credit; and (3) again delaying the scheduled reduction in the estate and gift tax rates from 

55 percent to 50 percent for five years.

The Omnibus Budget Reconciliation Act of 1990 replaced the special rules for estate 

freeze transactions with a new set of rules that effectively subject to gift tax the full value of 

interests in property, unless retained interests in that property take certain specified forms.47

The maximum estate, gift, and generation-skipping transfer tax rate dropped to 50 percent 

after December 31, 1992, but the Omnibus Budget Reconciliation Act of 199348 restored the 55-

percent top rate retroactively to January 1, 1993, and made that top rate permanent. The 

Taxpayer Relief Act of 199749 provided for gradual increases in the unified credit effective 

exemption amount from $625,000 in 1998 to $1 million in 2006 and thereafter. A conforming 

amendment made to the 5-percent surtax continues to phase out the benefit of the graduated 

rates, but not the benefit of the unified credit. A new exclusion for qualified conservation 

easements and a new deduction for interests in qualified family-owned businesses, in addition to 

other changes, also were enacted in 1997.

4. 1999 and subsequent legislation

The Taxpayer Refund and Relief Act of 1999

The Taxpayer Refund and Relief Act of 1999 (H.R. 2488),50 which was vetoed by 

President Clinton on September 23, 1999, would have phased out the estate, gift, and generationskipping transfer taxes, until the taxes were repealed in 2009.51 That legislation would have 

repealed the 5-percent surtax (which phases out the benefit of the graduate rates), converted the 

unified credit into an exemption, and reduced the tax rates from 2001 through 2008. Beginning 

in 2009, the estate, gift, and generation-skipping transfer taxes would have been repealed, and a 

carryover basis regime generally would have taken been phased in transfers from estates valued 

in excess of $2 million. Transfers to surviving spouses in excess of $3 million also would have 

received a carryover basis.

 

47 These rules are contained in sections 2701 through 2704 of present law.

48 P.L. 103-66 (August 10, 1993).

49 P.L. 105-34 (August 5, 1997).

50 H.R. Conf. Rep. No. 106-289 (August 5, 1999).

51 Section 1501 of H.R. 2488 provided that the provisions in the bill were to sunset 

beginning in 2009.
18

Availability of the conservation easement exclusion would have been expanded. In 

addition, several technical modifications also would have been made to the generation-skipping 

transfer tax, which would have been effective prior to its repeal in 2009.

Small Business Tax Fairness Act of 2000

The Small Business Tax Fairness Act of 2000 (H.R. 3081),52 which was passed by the 

House of Representatives on March 9, 2000, would have repealed the 5-percent surtax (which 

phases out the benefit of the graduated rates), the unified credit would have been converted into 

an exemption, and the rates of tax would have been reduced between 2001 and 2004.

Availability of the conservation easement exclusion also would have been expanded, as it 

would have in the Taxpayer Refund and Relief Act of 1999. In addition, the technical 

modifications to the generation-skipping transfer tax that were included in the Taxpayer Refund 

and Relief Act of 1999 also would have been included.

The Death Tax Elimination Act of 2000

The Death Tax Elimination Act of 2000 (H.R. 8),53 which was vetoed by President 

Clinton on August 31, 2000, would have phased out the estate, gift, and generation-skipping 

transfer taxes, until the taxes were repealed in 2010. That legislation would have repealed the 5-

percent surtax (which phases out the benefit of the graduate rates), converted the unified credit 

into an exemption, and reduced the tax rates from 2001 through 2009. Beginning in 2009, the 

estate, gift, and generation-skipping transfer taxes would have been repealed, and a carryover 

basis regime generally would have taken effect for transfers from estates in excess of $1.3 

million. Transfers to surviving spouses in excess of $3 million also would have received a 

carryover basis.

Availability of the conservation easement exclusion would have been expanded. In 

addition, several technical modifications also would have been made to the generation-skipping 

transfer tax, which would have been effective prior to its repeal in 2010.

5. Summary

Table 1 provides a summary of the annual gift tax exclusion, the exemption value of the 

unified credit, the threshold level of the highest statutory estate tax rate, and the highest statutory 

estate tax rate for selected years, 1977 through 2001.

 

52 H.R. Rep. No. 106-467 (November 11, 1999).

53 H.R. Rep. No. 106-651 (June 6, 2000).
19

Table 1.–Annual Gift Exclusion Amount, Exemption Value

of Unified Credit for Taxable Transfers, Threshold Level of Highest

Statutory Tax Rate, and Highest Statutory Tax Rate Applicable to

Taxable Transfers, Selected Years, 1977-2001

Year

Annual gift 

exclusion per 

donee single/

joint (dollars)

Exemption 

value of unified 

credit (dollars)

Threshold of 

highest 

statutory tax 

rate (dollars)

Highest 

statutory tax 

rate (percent)

1977 3,000/6,000 120,667 5 million 70

1982 10,000/20,000 225,000 4 million 65

1983 10,000/20,000 275,000 3.5 million 60

1984 10,000/20,000 325,000 3 million 55

1985 10,000/20,000 400,000 3 million 55

1986 10,000/20,000 500,000 3 million 55

1987 10,000/20,000 600,000 3 million 55

1989 10,000/20,000 600,000 3 million 551

1995 10,000/20,000 600,000 3 million 551

1997 10,000/20,000 600,000 3 million 551

1998 10,000/20,000 625,000 3 million 551

1999 10,000/20,000 650,000 3 million 551

2000 10,000/20,000 675,000 3 million 551

2001 10,000/20,000 675,000 3 million 551

Source: Joint Committee on Taxation.

Note: From 1987 through 1997, the benefits of the graduated rate structure and unified credit were phased out at a

5-percent rate for estates between $10,000,000 and $21,040,000, creating an effective marginal tax rate of 60 

percent for affected estates (with a $600,000 unified credit). The Taxpayer Relief Act of 1997 provided for gradual 

increases in the unified credit from $625,000 in 1998 to $1 million in 2006 and thereafter. A conforming 

amendment made to the 5-percent surtax continues to phase out the benefit of the graduated rates, but the benefit of 

the unified credit is no longer phased out. Thus, the 5-percent surtax now applies to taxable estates between $10 

million and $17,184,000.
20

II. BACKGROUND AND ANALYSIS RELATING 

TO ESTATE AND GIFT TAXATION

A. Background Data

Estates subject to the estate tax

Table 2 details the percentage of decedents subject to the estate tax for selected years 

since 1935. The percentage of decedents liable for the estate tax grew throughout the postwar era 

reaching a peak in the mid-1970s. The substantial revision to the estate tax in the mid-1970s54

and subsequent further modifications in 1981 reduced the percentage of decedents liable for the 

estate tax to less than one percent in the late 1980s. Since that time, the percentage of decedents 

liable for the estate tax has gradually increased.

 

54 See description of changes made to the estate tax in 1976 in Part I.B., above.
21

Table 2.BNumber of Taxable Estate Tax Returns Filed as a Percentage

of Deaths, Selected Years, 1935-1999

Taxable estate tax returns filed1

Year Deaths Number Percent of deaths

1935

1940

1945

1950

1955

1,172,245

1,237,186

1,239,713

1,304,343

1,379,826

8,655

12,907

13,869

17,411

25,143

0.74

1.04

1.12

1.33

1.82

1961

1966

1970

1973

1977

1,548,665

1,727,240

1,796,940

1,867,689

1,819,107

45,439

67,4042

93,4242

120,7612

139,1152

2.93

3.90

5.20

6.47

7.65

1982

1983

1984

1985

1986

1987

1988

19894

1,897,820

1,945,913

1,968,128

2,068,440

2,105,361

2,123,323

2,167,999

2,150,466

41,6202,3

35,1482,3

31,5072,3

30,5182,3

23,731

21,335

18,948

20,856

2.19

1.81

1.60

1.46

1.13

1.00

0.87

0.97

19904

19914

19924

19934

19944

19954

19964

19974

19984

2,148,463

2,169,518

2,175,613

2,268,553

2,278,994

2,312,132

2,314,690

2,314,245

2,337,256

23,215

24,897

27,187

27,506

31,918

31,564

37,711

42,901

47,483

1.08

1.15

1.25

1.21

1.40

1.37

1.63

1.85

2.03

1

 Estate returns need not be filed in the year of the decedent's death.

2

 Not strictly comparable with pre-1966 data. For later years the estate tax after credits was the basis for 

determining taxable returns. For prior years, the basis was the estate tax before credits.

3

 Although the filing requirement was for gross estates in excess of $225,000 for 1982 deaths, $275,000 for 1983 

deaths, and $325,000 for 1984 deaths, the data are limited to gross estates of $300,000 or more.

4

 Taxable estate data from 1989-1998 are from Internal Revenue Service, Statistics of Income.

Sources: Joseph A. Pechman, Federal Tax Policy (Washington Brookings Institutions), 1987; Internal Revenue

 Service, Statistics of Income; and U.S. National Center for Health Statistics.
22

The increasing percentage of decedents liable for estate tax in the period from 1940 

through the mid-1970s and the similar increasing percentage since 1989 are the result of the 

interaction of three factors: a fixed nominal exemption; the effect of price inflation on asset 

values; and real economic growth. The amount of wealth exempt from the Federal estate tax 

always has been expressed at a fixed nominal value. If the general price level in the economy 

rises from one year to the next and asset values rise to reflect this inflation, the "nominal" value 

of each individual's wealth will increase. With a fixed nominal exemption, annual increases in 

the price level will imply that more individuals will have a nominal wealth that exceeds the tax 

threshold. Alternatively stated, inflation diminishes the real, inflation-adjusted, value of wealth 

that is exempted by a nominal exemption. Thus, even if no one individual's real wealth 

increased, more individuals would be subject to the estate tax. This interaction between inflation 

and a fixed nominal exemption largely explains the pattern in Table 2.55 The fixed nominal 

exemption was increased effective for 1977 and again between 1982 and 1987. Prior to 1977 

and subsequent to 1987, the exemption was unchanged while the economy experienced general 

price inflation.

However, even if the exemption were modified annually to reflect general price inflation, 

one would still expect to see the percentage of decedents liable for estate tax rise because of the 

third factor, real growth. If the economy is experiencing real growth per capita, it must be 

accumulating capital.56 Accumulated capital is the tax base of the estate tax. Thus, real growth 

can lead to more individuals having real wealth above any given fixed real exempt amount.57

 

55 The 1988 percentage of decedents liable for estate tax of 0.87 may overstate the nadir 

achieved by the increase in the unified credit to an exemption equivalent amount of $600,000. 

This is because the 1981 legislation also increased the marital exemption to an unlimited 

exemption. (See Part I.B., above.) An increase in the marital exemption would be expected to 

reduce the percentage of decedents liable for the estate tax, both permanently and during a 

temporary period following the increase. The permanent effect results from some married 

couples having neither spouse liable for estate tax. The temporary reduction in the percentage of 

decedents liable for estate tax arises as follows. A married couple may have sufficient assets to 

be subject to the estate tax. During the transition period in which husbands and wives first take 

advantage of the unlimited marital exemption, the number of decedents liable for estate tax falls 

as the first spouse to die takes advantage of the expanded marital deduction, despite the fact that 

the surviving spouse subsequently dies with a taxable estate. In the long run, the number of new 

couples utilizing the unlimited marital deduction may be expected to approximately equal the 

number of surviving spouses becoming taxable after their decedent spouse had claimed the 

unlimited marital deduction.

56 The following analysis assumes that the capital accumulated is physical or business 

intangible capital. Real per capita GNP could grow if individuals accumulated more knowledge 

and skills, or what economists call "human capital." Accumulation of human capital 

unaccompanied by the accumulation of physical or business intangible capital would not 

necessarily lead to increasing numbers of decedents becoming liable for estate tax.

57 This analysis assumes that the capital accumulation is held broadly. If the growth in 

the capital stock were all due to a declining number of individuals doing the accumulating, then 
23

Revenues from the estate, gift, and generation-skipping taxes

Table 3 provides summary statistics of the estate and gift tax for selected years. Total 

estate and gift receipts include taxes paid for estate, gift, and generation-skipping taxes as well as 

payments made as the result of IRS audits.

Between 1993 and 1999, estate and gift receipts averaged double digit rates of growth. 

There are three possible reasons for the rapid growth in these receipts. First, because neither the 

amount of wealth exempt from the estate and gift tax or the tax rates were indexed, as explained 

above, an increasing number of persons became subject to estate and gift taxes. Second, the 

tremendous increase in value in the stock market over the past several years increased the value 

of estates that would have already been taxable, and increased the number of estates that became 

taxable. For example, the Dow Jones Industrial Average ended 1993 at approximately 3750, and 

ended 1999 at approximately 11,000. On average, one-third of the wealth in taxable estates 

consists of publicly traded stocks. Because the value of this component of wealth has more than 

doubled during the past five years, one would expect brisk growth in estate tax receipts from this 

alone. Finally, the unlimited marital deduction included in the 1981 Act delayed the payment of 

estate tax, in most cases, until the surviving spouse died. On average, spouses survive their 

mates by about ten years. Therefore, during the decade of the 1990s, an increase in estate tax 

receipts is expected as the result of first-spouse deaths during the 1980s that used the unlimited 

marital deduction.

 

the distribution of wealth would become less equal and real growth could be accompanied by a 

declining percentage of decedents being liable for estate tax.
24

Table 3.BRevenue from the Estate, Gift, and Generation-Skipping

Transfer Taxes, Selected Fiscal Years, 1940-1999

Year

Revenues

($ Millions)

Percentage of total

Federal receipts

1940......................................

1945......................................

1950......................................

1955......................................

1960......................................

1965......................................

1970......................................

357

638

698

924

1,606

2,716

3,644

6.9

1.4

1.9

1.4

1.7

2.3

1.9

1975......................................

1976......................................

1977......................................

1978......................................

1979......................................

4,611

5,216

7,327

5,285

5,411

1.7

1.7

2.1

1.3

1.2

1980......................................

1981......................................

1982......................................

1983......................................

1984......................................

6,389

6,787

7,991

6,053

6,010

1.2

1.1

1.3

1.0

0.9

1985......................................

1986......................................

1987......................................

1988......................................

1989......................................

6,422

6,958

7,493

7,594

8,745

0.9

0.9

0.9

0.8

0.9

1990......................................

1991......................................

1992......................................

1993......................................

1994......................................

11,500

11,138

11,143

12,577

15,255

1.12

1.06

1.02

1.09

1.21

1995......................................

1996......................................

1997......................................

1998......................................

1999......................................

15,087

17,189

19,845

24,076

27,782

1.12

1.18

1.26

1.40

1.52

Sources: Joint Economic Committee, The Federal Tax System: Facts and Problems, 1964; Joseph A. Pechman, 

Federal Tax Policy (Washington: Brookings Institution), 1987; Internal Revenue Service, Statistics of Income
25

On the other hand, the 1997 Act included provisions that would be expected to reduce the 

number of estates subject to the estate tax. As explained in Part I, above, the 1997 Act enacted a 

schedule of increases in the unified credit which will culminate in the unified credit effectively 

exempting $1 million of a decedent's estate from tax beginning for decedents dying in 2006. 

Given most forecasts of inflation, this change increases the real (inflation adjusted) value of the 

$600,000 exemption that was available under the estate and gift tax between 1987 and 1997.58 

As explained above, increases in the real value of the unified credit generally would be expected 

to reduce the number of estates subject to tax. The 1997 Act also provided an additional 

exemption for certain qualified family-owned business interests and a partial exclusion from the 

estate tax of the value of land subject to certain conservation easements, fewer estates would be 

expected to be subject to tax.

Table 4 shows the Joint Committee on Taxation staff present-law estimate of revenues 

from the estate, gift, and generation-skipping taxes for fiscal years 2000-2011. These estimates 

are based on the January 2001 baseline forecast for estate, gift, and generation-skipping taxes 

supplied by the Congressional Budget Office. Table 4 reports the Joint Committee on Taxation 

staff estimates of annual taxable estates and calculates the percentage of all deaths that taxable 

estates will represent.

 

58 If the inflation rate were to be 3 percent for each year between 1997 and 2006; the 

inflation-adjusted value of $600,000 in 2006 would be approximately $783,000.
26

Table 4.BProjections of Taxable Estates and Receipts from Estate, Gift,

and Generation-Skipping Transfer Taxes, 1999-2011

Year

Exemption 

value of

unified credit

Number of 

taxable estates

Percent

of deaths

Receipts

($ billions)

2000 675,000 51,700 2.18 29.0

2001 675,000 51,800 2.15 30.2

2002 700,000 55,700 2.30 32.5

2003 700,000 56,800 2.32 34.9

2004 850,000 58,600 2.38 36.0

2005 950,000 50,900 2.07 36.4

2006 1,000,000 46,600 1.86 37.3

2007 1,000,000 48,700 1.93 39.8

2008 1,000,000 53,500 2.11 43.7

2009 1,000,000 56,700 2.22 46.4

2010 1,000,000 60,500 2.35 49.3

2011 1,000,000 65,500 2.52 53.4

Source: Joint Committee on Taxation staff estimates and calculations based on U.S. Census Bureau estimates of 

deaths from Population Estimates Program, Population Projections Branch, Population Division, U.S. Census 

Bureau, 2000.

B. Comparison of Transfer Taxation in the

United States and Other Countries

Among developed countries, an inheritance tax is more common than the type of estate 

tax that is imposed in the United States. An inheritance tax generally is imposed upon the 

amount of wealth the transferee or donee receives rather than on the total wealth of the 

transferor. That is, the funds the heir receives in a bequest determines the tax imposed. The 

United States also imposes a generation-skipping tax in addition to any estate or gift tax liability 

on certain transfers to generations two or more younger than that of the transferee. This 

effectively raises the marginal tax rates on affected transfers. Countries that impose an 

inheritance tax do not have such a separate tax but may impose higher rates of inheritance tax on 
27

bequests that skip generations. Among developed countries, Australia and Canada impose 

neither an estate tax nor an inheritance tax.59

Because the U.S. estate and gift tax exempts transfers between spouses, it provides an 

effective additional exemption of $675,000 (in 2001) through the unified credit, and exempts 

$10,000 of gifts per year per donee, the United States may have a larger exemption (a larger 

zero-rate tax bracket) than many other developed countries.60 However, because most other 

countries have inheritance taxes, the total exemption depends upon the number and type of 

beneficiaries. While the effective exemption may be larger, with the exception of transfers to 

spouses, which are untaxed, marginal tax rates on taxable transfers in the United States generally 

are greater than those in other countries. This is particularly the case when comparing transfers to 

close relatives, who under many inheritance taxes face lower marginal tax rates than do other 

beneficiaries. On the other hand, the highest marginal tax may be applied at a greater level of 

wealth transfer than in other countries. It is often difficult to make comparisons between the U.S. 

estate tax and countries with inheritance taxes because the applicable marginal tax rate depends 

on the pattern of gifts and bequests.

It is difficult to assess the extent to which the practice of any of the foreign transfer taxes 

is comparable to the practice of transfer taxation in the United States. For example, in the United 

States, transfers of real estate generally are valued at their full and fair market value. In Japan, 

real estate is assessed at less than its fair market value. Land is assessed for inheritance tax 

purposes according to a valuation map known as Rosen Ka. The Rosen Ka values range from 25 

to 80 percent of fair market value.61 It is also unclear to what extent transferors may be able to 

exploit legal loopholes under the various systems imposed by other countries. Again, using 

Japan as an example, prior to 1988, a transferor could reduce inheritance tax liability by adopting 

children to increase the number of legal heirs.62 Such adoptees of convenience would receive 

nominal compensation for agreeing to be an adoptive child. The larger the number of children, 

the greater the total exemption for inheritance taxes in Japan, even if not all children receive a 

 

59 For a survey of the transfer tax systems of 28 countries see Joint Committee on 

Taxation, Issues Presented by Proposals to Modify the Tax Treatment of Expatriation (JCS-17-

95), June 1, 1995, pp. C-1 through C-17. In Australia, the transferee receiving assets with 

accrued capital gains transferred at death retains the transferor's basis in the assets (carryover 

basis). In Canada, gains accrued on assets held by a taxpayer at the time of his or her death are 

treated as realized and taxable as income to the taxpayer. Assets transferred to a spouse are 

untaxed but retain the decedent spouse's basis (carryover basis).

60 Joint Committee on Taxation, Issues Presented by Proposals to Modify the Tax 

Treatment of Expatriation (JCS-17-95), June 1, 1995.

61 Thomas A. Barthold and Takatoshi Ito, "Bequest Taxes and Accumulation of 

Household Wealth: U.S.-Japan Comparison," in Takatoshi Ito and Anne O. Kreuger (eds.), The 

Political Economy of Tax Reform (Chicago: The University of Chicago Press), 1992, pp. 250-

251.

62 Adoption by another did not cause an adoptee to lose his or her legal right to be an heir 

of his or her biological parents.
28

bequest. This legal loophole was said to be widely recognized and exploited by wealthy

families.63

Table 5 compares total revenue collected by OECD countries from estate, inheritance, 

and gift taxes to total tax revenue and to gross domestic product (“GDP”) to attempt to compare 

the economic significance of wealth transfer taxes in different countries. Among these selected 

OECD countries, Belgium, France, and Japan collect more such revenue as a percentage of GDP 

than does the United States. Switzerland and the Netherlands collect modestly less revenue from 

such taxes as a percentage of GDP than does the United States. The remaining 21 countries in 

Table 5 collect substantially less revenue from such taxes as a percentage of GDP than does the 

United States. As a percentage of tax revenue, only Japan relies more heavily on its inheritance 

tax as a revenue source, although Belgium, France, and Switzerland each collected at least 0.8 of 

one percent of total tax revenue from estate, inheritance, and gift taxes.

 

63 Barthold and Ito, "Bequest Taxes and Accumulation of Household Wealth," p. 249.
29

Table 5.BRevenue from Estate, Inheritance and Gift Taxes as a Percentage

of Total Tax Revenue and GDP in OECD Countries, 1998

Country

Percentage of

total tax revenue Percentage of GDP

Australia .....................................

Austria ........................................

Belgium.......................................

Canada........................................

Czech Republic...........................

Denmark......................................

Finland........................................

France.........................................

Germany......................................

Greece1.......................................

Hungary.......................................

Iceland ........................................

Ireland.........................................

Italy.............................................

Japan...........................................

Korea..........................................

Luxembourg ................................

Netherlands.................................

New Zealand...............................

Norway.......................................

Poland.........................................

Portugal.......................................

Spain...........................................

Sweden.......................................

Switzerland.................................

Turkey.........................................

United Kingdom..........................

United States...............................

0.00

0.12

0.86

0.00

0.08

0.37

0.53

1.13

0.34

0.68

0.11

0.27

0.58

0.18

1.36

0.72

0.24

0.78

0.01

0.24

0.06

0.25

0.57

0.20

1.00

0.05

0.57

1.25

0.00

0.06

0.40

0.00

0.03

0.19

0.25

0.51

0.13

0.26

0.04

0.09

0.19

0.08

0.39

0.15

0.10

0.32

0.00

0.11

0.02

0.09

0.20

0.11

0.35

0.02

0.21

0.36

Note: Data not directly comparable to data reported in Table 3. The OECD attempts to collect standardized data 

across member countries. OECD data includes tax revenue collected by the State as well as the Federal 

Government. Therefore data in OCED reports for the United States may not perfectly correspond to data as 

reported by OMB.

1

 1997 data.

Sources: Organization for Economic Cooperation and Development, Revenue Statistics, 1965-1998 

(Paris: OCED), 2000.
30

The United States is a wealthy country, with higher average household wealth than most 

of the countries surveyed. While exemption levels are higher in the United States than most 

other countries, a significant amount of accumulated wealth still may be subject to estate and gift 

taxation as compared to the other countries. The data in Table 5 do not reveal the extent to 

which estate, inheritance, and gift taxes fall across different individuals within each country. In 

the United States, as reported in Table 2, above, of the 2.3 million deaths in 1998, only 47,483 or 

2.03 percent of decedents, gave rise to any estate tax liability. Similar data were not available for 

the other countries in this survey.

C. Economic Issues Related to Transfer Taxation

Taxes on income versus taxes on wealth

Income taxes, payroll taxes, and excise and other consumption taxes generally tax 

economic activity as it occurs. Income and consumption represent ongoing, current economic 

activity by the taxpayer.64 Estate and gift taxes are levied on the transfer of accumulated wealth. 

Accumulated wealth does not result from any ongoing, current economic activity.65 Wealth 

depends upon previous economic activity either by the current wealth holder or other individuals. 

For example, current wealth can result from accumulated saving from income or from bequests 

received.

Taxes on wealth are not directly comparable to taxes on income. Because wealth is the 

accumulation of flows of saving over a period of years, taxes on wealth are not directly 

comparable to taxes on income or consumption which may represent only current, rather than 

accumulated, economic activity. For example, assume that a taxpayer receives wage income of 

$10,000 per year, saves all of this income, and the savings earn an annual return of 5 percent. At 

the end of five years, the accumulated value of the taxpayer's investments would be $58,019. 

Assume that the wealth is transferred at the end of the fifth year. If a 10-percent tax were 

imposed on wage income, one would conclude that a burden of $1,000 was imposed annually. If 

a 10-percent tax were imposed on the transfer of wealth, one would conclude that a burden of 

$5,801.90 was imposed at the end of the fifth year. If, after paying the wage tax, the taxpayer 

had invested the remaining $9,000 each year to earn 5 percent, the taxpayer's holding would be 

$52,217.10 at the end of five years. This is the same value that would remain under the wealth 

tax ($58,019.00 less $5,801.90). Thus, it is misleading to say that the burden of the wage tax is 

$1,000 in each year while the burden of the transfer tax is $5,801.90 in the fifth year.66

 

64 Economists call income and consumption "flow" concepts. In simple terms, a flow can 

only be measured by reference to a unit of time. Thus, one refers to a taxpayer's annual income 

or monthly consumption expenditures.

65 Economists call wealth a "stock" concept. A stock of wealth, such as a bank account, 

may generate a flow of income, such as annual interest income.

66 James Poterba, “The Estate Tax and After-Tax Investment Returns,” in Joel B. 

Slemrod, ed., Does Atlas Shrug? The Economic Consequences of Taxing the Rich (New York 

and Cambridge: Russell Sage Foundation and Harvard University Press), 2000. Poterba 
31

Wealth taxes, saving, and investment

Taxes on accumulated wealth are taxes on the stock of capital held by the taxpayer. As a 

tax on capital, issues similar to those that arise in analyzing any tax on the income from capital 

arise. In particular, there is no consensus among economists on the extent to which the incidence 

of taxes on the income from capital is borne by owners of capital in the form of reduced returns 

or whether reduced returns cause investors to save less and provide less capital to workers,

thereby reducing wages in the long run. A related issue is to what extent individuals respond to 

increases (or decreases) in the after-tax return to investments by decreasing (or increasing) their 

saving. Again, there is no concensus in either the empirical or theoretical economics literature 

regarding the responsiveness of saving to after-tax returns on investment.67

Some economists believe that an individual's bequest motives are important to 

understanding saving behavior and aggregate capital accumulation. If estate and gift taxes alter 

the bequest motive, they may change the tax burdens of taxpayers other than the decedent and 

his or her heirs.68 It is an open question whether the bequest motive is an economically important 

explanation of taxpayer saving behavior and level of the capital stock. For example, theoretical 

analysis suggests that the bequest motive may account for between 15 and 70 percent of the 

United States' capital stock.69 Others question the importance of the bequest motive in national 

 

converts the estate tax to a tax on capital income with the effective tax rate depending on the 

statutory tax rate as well as the potential taxpayer’s mortality risk.

67 For a more detailed discussion of the incidence of taxes on the income from capital 

and the responsiveness of saving to after-tax rate of returns, see Joint Committee on Taxation, 

Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens (JCS-7-93), 

June 14, 1993, pp. 44-46. 

68 A recent discussion of why, theoretically, the effect of the estate tax on saving 

behavior depends upon taxpayers’ motives for intergenerational transfers and wealth 

accumulation is provided by William G. Gale and Maria G. Perozek, “Do Estate Taxes Reduce 

Saving?” in William G. Gale and Joel B. Slemrod, eds., Rethinking the Estate Tax, (Washington, 

D.C: The Brookings Institution), forthcoming 2001. For a brief review of how different views 

of the bequest motive may alter taxpayer bequest behavior, see William G. Gale and Joel B. 

Slemrod, “Death Watch for the Estate Tax,” Journal of Economic Perspectives, 15, Winter, 

2001, pp. 205-218.

69 See, Laurence J. Kotlikoff and Lawrence H. Summers, "The Role of Intergenerational 

Transfers in Aggregate Capital Accumulation," Journal of Political Economy, 89, August, 1981. 

Also see, Laurence J. Kotlikoff, "Intergenerational Transfers and Savings," Journal of Economic 

Perspectives, 2, Spring, 1988. For discussion of these issues in the context of wealth transfer 

taxes see, Henry J. Aaron and Alicia H. Munnell, "Reassessing the Role for Wealth Transfer 

Taxes," National Tax Journal, 45, June, 1992. For recent attempts to calculate the share of the 

aggregate capital stock attributable to the bequest motive, see Barthold and Ito, "Bequest Taxes 

and Accumulation of Household Wealth," and William G. Gale and John Karl Scholz, 

"Intergenerational Transfers and the Accumulation of Wealth," Journal of Economic 

Perspectives, 8, Fall 1994, pp. 145-160. Gale and Scholz estimate that 20 percent of the nation's 
32

capital formation.70 Nor has direct empirical analysis of the existence of a bequest motive led to 

a consensus.71 Theoretically, it is an open question whether estate and gift taxes encourage or 

discourage saving and there has been no empirical analysis of this specific issue. By raising the 

cost, in terms of taxes, of leaving a bequest, potential transferors may be discouraged from 

accumulating the assets necessary to make a bequest. On the other hand, a taxpayer who wants to 

leave a bequest of a certain net size might save more in response to estate taxation in order to 

meet that goal. For example, some individuals purchase additional life insurance in order to 

have sufficient funds to pay the estate tax without disposing of other assets in their estate.

Regardless of any potential effect on aggregate saving, the transfer tax system may affect 

the composition of investment. In particular, some observers note that the transfer tax system 

may impose special cash flow burdens on small or family-owned businesses. They note that if a 

family has a substantial proportion of its wealth invested in one enterprise, the need to pay estate 

taxes may force heirs to liquidate all or part of the enterprise or to encumber the business with 

debt to meet the estate tax liability. If the business is sold, while the assets generally do not 

cease to exist and remain a productive part of the economy, the share of business represented by 

small or family-owned businesses may be diminished by the estate tax. If the business borrows 

to meet estate tax liability, the business's cash flow may be strained. There is some evidence that 

 

capital stock can be attributed to "intentional transfers" (including inter vivos transfers, life 

insurance, and trusts) and another 30 percent can be attributed to bequests, whether planned or 

unplanned.

70 Franco Modigliani, "The Role of Intergenerational Transfers and Life Cycle Saving in 

the Accumulation of Wealth," The Journal of Economic Perspectives, 2, Spring, 1988. In this 

article, Modigliani argues that 15 percent is more likely an upper bound.

71 See, B. Douglas Bernheim, "How Strong Are Bequest Motives? Evidence Based on 

Estimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, 99, 

October 1991, pp. 899-927. Bernheim finds that social security annuity benefits raise life 

insurance holdings and depress private annuity holdings among elderly individuals. He interprets 

this as evidence that elderly individuals choose to maintain a positive fraction of their resources 

in bequeathable forms. For an opposing finding, see Michael D. Hurd, "Savings of the Elderly 

and Desired Bequests," American Economic Review, 77, June 1987, pp. 298-312. Hurd 

concludes that "any bequest motive is not an important determinant of consumption decisions 

and wealth holdings.... Bequests seem to be simply the result of mortality risk combined with a 

very weak market for private annuities." (p. 308). 

Wojciech Kopczuk and Joel Slemrod, “The Impact of the Estate Tax on the Wealth 

Accumulation and Avoidance Behavior of Donors,” in William G. Gale and Joel B. Slemrod, 

eds., Rethinking Estate and Gift Taxation, (Washington, D.C.: The Brookings Institution), 

forthcoming 2001, use estate tax return data from 1916 to 1996 to investigate the impact of the 

estate tax on reported estates. They find a negative correlation between measures of the level of 

estate taxation and reported wealth. This finding may be consistent with the estate tax 

depressing wealth accumulation (depressing saving) or with the estate tax encouraging 

successful avoidance activity.
33

many businesses may be constrained by the capital markets in the amount of funds they can 

borrow. If they are so constrained, they may reduce the amount of investment they undertake, to 

the detriment of the economy at large.72 Undercapitalization may be prevalent among small 

businesses. One study suggests that reduction in estate taxes may have a positive effect on an 

entrepreneur's survival.73

Others argue that potential deleterious effects on investment by small or family-owned 

businesses are limited. As a result of the Taxpayer Relief Act of 1997, certain small businesses 

can obtain an effective exemption of up to $2.6 million per married couple, and other legitimate 

tax planning can further reduce the burden on such enterprises. Some have argued that estate tax 

returns report a small fraction of the value of decedents' estates.74

As described in Part I, above, several Code provisions may reduce the burden of the 

estate tax borne by small or family-owned businesses. Tables 6a and 6b, below, present data 

from estate tax returns filed in 1999 on the utilization of these provisions in comparison to all 

estate tax returns filed (Table 6a) and in comparison to those estate tax returns with a positive 

estate tax liability (Table 6b). In each table the data reported in the rows relate to returns 

claiming benefits under sec. 2032A (special use valuation of real property), sec 2057 (exemption 

for qualified family-owned business interests), both sec. 2032A and 2057 on the same return, and 

sec. 6166 (extended payment period and reduced interest charge on installment payments). The 

 

72 Steven M. Fazzari, R. Glenn Hubbard, and Bruce C. Petersen, "Financing Constraints 

and Corporate Investment," Brookings Papers on Economic Activity, 1988, pp. 141-195.

73 Douglas Holtz-Eakin, David Joulfaian, and Harvey S. Rosen, "Sticking It Out: 

Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, 102, 

February 1994, pp. 53-75. Holtz-Eakin, Joulfaian, and Rosen study the effect of receipt of an 

inheritance on whether an entrepreneur's business survives rather than whether an on-going 

business is taxed as an asset in an individual's estate survives. They find that "the effect of 

inheritance on the probability of surviving as an entrepreneur is small but noticeable: a $150,000 

inheritance raises the probability of survival by about 1.3 percentage points," and "[i]f enterprises 

do survive, inheritances have a substantial impact on their performance: the $150,000 inheritance 

... is associated with a nearly 20-percent increase in an enterprise's receipts" (p.74).

These results do not necessarily imply that the aggregate economy is made better off by 

receipt of inheritances. Survival of the entrepreneur may not be the most highly valued 

investment that could be made with the funds received.

74

 See George Cooper, A Voluntary Tax? New Perspectives on Sophisticated Tax 

Avoidance, (Washington, D.C.: The Brookings Institution), 1979. Also, see B. Douglas 

Bernheim, "Does the Estate Tax Raise Revenue?" in Lawrence H. Summers (ed.), Tax Policy 

and the Economy, 1, (Cambridge, Mass.: The MIT Press), 1987; and Alicia H. Munnell with 

Nicole Ernsberger, "Wealth Transfer Taxation: The Relative Role for Estate and Income Taxes," 

New England Economic Review, November/December 1988. These studies pre-date the 

enactment of chapter 14 of the Internal Revenue Code. The purpose of chapter 14 is to improve 

reporting of asset values in certain transfers.
34

returns reported in the first three rows of each table are mutually exclusive. Returns reported 

claiming benefits under sec. 6166 also may have utilized sec. 2032A, sec. 2057, or both. The 

data in Tables 6a and 6b show that in 1999 approximately one percent of all returns filed utilized 

one or both of sec. 2034A and sec. 2057. Among taxable returns less than three-quarters of one 

percent utilized one or both of sec. 2032A or sec. 2057.

Table 6a. --Estate Tax Returns Filed in 1999 Utilizing Provisions

to Benefit Small and Family-Owned Businesses

Number

of

Estates

Percentage of 

All Estate

Tax Returns 

Filed

Aggregate 

Value of

Gross Estate

($ Millions)

Percentage of 

Aggregate 

Value of All 

Estate Tax 

Returns Filed

Claiming benefits 

under sec. 2032A 

only........................... 141 0.14% 212.6 0.11%

Claiming benefits 

under sec. 2057

only........................... 804 0.77% 2,045.3 1.04%

Claiming benefits 

under both secs. 

2032A and

2057.......................... 84 0.08% 216.1 0.11%

Claiming

benefits under

sec. 6166................... 524 0.50% 5.2 (1)

(1) Less than 0.01 percent.

Source: Joint Committee on Taxation staff tabulations from Internal Revenue Service Statistics of Income data.
35

Table 6b. --Taxable Estate Tax Returns Utilizing Provisions to 

Benefit Small and Family-Owned Businesses, 1999

Number

of

Estates

Percentage of 

All Estate

Tax Returns 

Filed

Aggregate 

Value of

Gross Estate

($ Millions)

Percentage of 

Aggregate 

Value of All 

Estate Tax 

Returns Filed

Claiming benefits 

under sec. 2032A 

only........................... 77 0.15% 124.6 0.54%

Claiming benefits 

under sec. 2057

only........................... 235 0.47% 1,102.2 4.81%

Claiming benefits 

under both secs. 

2032A and

2057.......................... 34 0.07% 139.0 0.61%

Claiming

benefits under

sec. 6166................... 524 1.05% 5.2 0.02%

Source: Joint Committee on Taxation staff tabulations from Internal Revenue Service Statistics of Income data.

Wealth taxes and labor supply

As people become wealthier, they generally choose to consume more leisure time. Some, 

therefore, suggest that, by reducing the potential wealth of heirs, transfer taxes may have an 

effect on labor supply. Over 100 years ago, Andrew Carnegie opined that "the parent who leaves 

his son enormous wealth generally deadens the talents and energies of the son, and tempts him to 

lead a less useful and less worthy life than he otherwise would...."75 While, in theory, increases 

in wealth should reduce labor supply, empirically economists have not found strong support for 

this proposition.76

 

75 Andrew Carnegie, "The Advantages of Poverty," in The Gospel of Wealth and Other 

Timely Essays, Edward C. Kirkland (ed.), (Cambridge, MA: The Belknap Press of Harvard 

University Press), 1962, reprint of Carnegie from 1891.

76 For a review of this issue, see John Pencavel, "Labor Supply of Men: A Survey," in 

Orley Ashenfelter and Richard Layard (eds.), Handbook of Labor Economics, vol. I, (New York, 

NY: North-Holland Publishing Co.) 1986. For a direct empirical test of what some refer to as the 
36

In the case of family-owned businesses, the estate tax could increase work effort of heirs 

as the benefits of the installment payment method, the special use valuation, and exclusion for 

qualified family-owned business interests will be lost and recaptured if the assets fail to remain 

in a qualified use. In addition, the estate tax also could distort, in either direction, the labor 

supply of the transferor if it distorts his or her decision to make a bequest. 

Wealth taxes, the distribution of wealth, and fairness

Some suggest that, in addition to their role in producing Federal revenue, Federal transfer 

taxes may help prevent an increase in the concentration of wealth. There are relatively few 

analyses of the distribution of wealth holdings.77 Conventional economic wisdom holds that the 

Great Depression of the 1930s and the second world war substantially reduced the concentration 

of wealth in the United States, and that there has been no substantial change in the succeeding 

decades. Most analysts assign no role to tax policy in the reduction in wealth concentration that 

occurred between 1930 and 1945. Nor has any analyst been able to quantify what role tax policy 

might have played since the second world war.78

Others note that the income tax does not tax all sources of income. They suggest that by 

serving as a "backstop" for income that escapes income taxation, transfer taxes may help 

promote overall fairness of the U.S. tax system. Others counter that to the extent that much 

 

"Carnegie Conjecture," see Douglas Holtz-Eakin, David Joulfaian, and Harvey S. Rosen, "The 

Carnegie Conjecture: Some Empirical Evidence," Quarterly Journal of Economics, 108, May 

1993, pp. 413-435. Holtz-Eakin, Joulfaian, and Rosen assess the labor force participation of 

families that receive an inheritance. They find that "the likelihood that a person decreases his or 

her participation in the labor force increases with the size of the inheritance received. For 

example, families with one or two earners who received inheritances above $150,000 [in 1982-

1985 constant dollars] were about three times more likely to reduce their labor force participation 

to zero than families with inheritances below $25,000. Moreover, ... high inheritance families 

experienced lower earnings growth than low inheritance families, which is consistent with the 

notion that inheritance reduces hours of work" (pp. 432-433). Theory suggests also that those 

who choose to remain in the labor force will reduce their hours worked or labor earnings. HoltzEakin, Joulfaian, and Rosen finds these effects to be small.

77 For some exceptions, see Martin H. David and Paul L. Menchik, "Changes in Cohort 

Wealth Over a Generation," Demography, 25, August 1988; Paul L. Menchik and Martin H. 

David, "The Effect of Income Distribution on Lifetime Savings and Bequests," American 

Economic Review, 73, September 1983; and Edward N. Wolff, "Estimate of Household Wealth 

Inequality in the U.S., 1962-1983," The Review of Income and Wealth, 33, September 1987.

78 See Michael K. Taussig, "Les inegalites de patrimoine aux Etats-Unis," in Kessler, 

Masson, Strauss-Khan (eds.) Accumulation et Repartition des Patrimoines. Taussig estimates 

shares of wealth held by the top 0.5 percent of wealth holders in the United States for various 

years between 1922 and 1972. Wolff, in "Estimate of Household Wealth Inequality in the U.S., 

1962-1983," does not attribute any movements in wealth contribution directly to tax policy, but 

rather to the changes in the relative values of housing and corporate stock.
37

wealth was accumulated with after-(income)-tax dollars, as an across-the-board tax on wealth, 

transfer taxes tax more than just those monies that may have escaped the income tax. In addition, 

depending upon the incidence of such taxes, it is difficult to make an assessment regarding the 

contribution of transfer taxes to the overall fairness of the U.S. tax system.

Even if transfer taxes are believed to be borne by the owners of the assets subject to tax, 

an additional conceptual difficulty is whether the tax is borne by the generation of the transferor 

or the generation of the transferee. The design of the gift tax illustrates this conceptual difficulty. 

A gift tax is assessed on the transferor of taxable gifts. Assume, for example, a mother makes a 

gift of $1 million to her son and incurs a gift tax liability of $500,000. From one perspective, the 

gift tax could be said to have reduced the mother's current economic well-being by $500,000. 

However, it is possible that, in the absence of the gift tax, the mother would have given her son 

$1.5 million, so that the gift tax has reduced the son's economic well-being by $500,000. It also 

is possible that the economic well-being of both was reduced. Of course, distinctions between the 

donor and donee generations may not be important to assessing the fairness of transfer taxes if 

both the donor and donee have approximately the same income.79

Federal estate taxation and charitable bequests

The two unlimited exclusions under the Federal estate tax are for bequests to a surviving 

spouse and for bequests to a charity. Because the marginal tax rates under the estate tax range 

from 37 percent to 55 percent, while marginal income tax rates range from 15 to 39.6 percent, 

the after-tax cost of a charitable bequest is lower than the after-tax cost of a charitable gift made 

during one's lifetime.80 Economists refer to this incentive as the "price" or "substitution effect." 

 

79 Researchers have found that the correlation of income between parents and children is 

less than perfect. For analysis of the correlation of income among family members across 

generations, see Gary R. Solon, "Intergenerational Income Mobility in the United States," 

American Economic Review, 82, June 1992, and David J. Zimmerman, "Regression Toward 

Mediocrity in Economic Stature," American Economic Review, 82, June 1992. These studies, 

however, examine data relating to a broad range of incomes in the United States and do not 

directly assess the correlation of income among family members with transferors subject to the 

estate tax.

80 Economists note that when expenditures on specified items are permitted to be 

deducted from the tax base, before the computation of tax liability, the price of the deductible 

item is effectively reduced by a percentage equal to the taxpayer's marginal tax rate. Assume, for 

example, a decedent has a $1 million taxable estate and that the marginal, and average, estate tax 

rate were 40 percent. This means that the estate tax liability would be $400,000. A net of 

$600,000 would be available for distribution to heirs. If, however, the decedent had provided 

that his estate make a charitable bequest of $100,000, the taxable estate would equal $900,000 

and the estate tax liability would be $360,000. By bequeathing $100,000 to charity, the estate's 

tax liability fell by $40,000. The net available for distribution to heirs after payment of the estate 

tax and payment of the charitable bequest would be $540,000. The $100,000 charitable bequest 

only reduced the amount of funds available to be distributed to heirs by $60,000. Economists 

say that the $100,000 charitable bequest "cost" $60,000, or that the "price" of the bequest was 60 
38

In short, the price effect says that if something is cheaper, people will do more of it. Some 

analysts have suggested that the charitable estate tax deduction creates a strong incentive to make 

charitable bequests and that changes in Federal estate taxation could alter the amount of funds 

that flow to charitable purposes. The decision to make a charitable bequest arises not only from 

the incentive effect of a charitable bequest's deductibility, or "tax price," but also from what 

economists call the "wealth effect." Generally the wealthier an individual is, the more likely he 

or she is to make a charitable bequest and the larger the bequest will be. Because the estate tax 

diminishes net wealth, the wealth effect would suggest repeal of the estate tax could increase 

charitable bequests.

A limited number of studies have examined the effects of estate taxes on charitable 

bequests. Most of these studies have concluded that, after controlling for the size of the estate 

and other factors, deductibility of charitable bequests encourages taxpayers to provide charitable 

bequests.81 Some analysts interpret these findings as implying that reductions in estate taxation 

could lead to a reduction in funds flowing into the charitable sector. This is not necessarily the 

case, however. Some charitable bequests may substitute for lifetime giving to charity, in part to 

take advantage of the greater value of the charitable deduction under the estate tax than under the 

income tax that results from the lower marginal income tax rates and limitations on annual 

lifetime giving. If this is the case, reductions in the estate tax could lead to increased charitable 

giving during the taxpayer's life. On the other hand, some analysts have suggested that a more 

sophisticated analysis is required recognizing that a taxpayer may choose among bequests to 

charity, bequests to heirs, lifetime gifts to charity, and lifetime gifts to heirs and recognize that 

 

cents per dollar of bequest. More generally, the "price" of charitable bequest equals (1 - t), 

where t is the estate's marginal tax rate.

81 For example, see Charles T. Clotfelter, Federal Tax Policy and Charitable Giving

(Chicago: University of Chicago Press), 1985; David Joulfaian, ACharitable Bequests and Estate 

Taxes, National Tax Journal, 44, June 1991, pp. 169-180; and Gerald Auten and David 

Joulfaian, ACharitable Contributions and Intergenerational Transfers,@ Journal of Public 

Economics, 59, 1996, pp. 55-68. David Joulfaian, "Estate Taxes and Charitable Bequests by the 

Wealthy," National Tax Journal, 53, September 2000, pp. 743-763, provides a recent survey of 

these studies and presents new evidence. Each of these studies estimates a tax price elasticity in 

excess of 1.6 in absolute value. This implies that for each 10-percent reduction in the tax price, 

where the tax price is defined as one minus the marginal tax rate, there is a greater than 16-

percent increase in the dollar value of charitable bequests. Such a finding implies that charities 

receive a greater dollar value of bequests than the Treasury loses in forgone tax revenue.

Not all studies find such responsiveness of charitable bequests to the marginal estate tax 

rate. Thomas Barthold and Robert Plotnick, AEstate Taxation and Other Determinants of 

Charitable Bequests,@ National Tax Journal, 37, June 1984, pp. 225-237, estimated that marginal 

tax rates had no effect on charitable bequests.
39

lifetime gifts reduce the future taxable estate. In this more complex framework, reductions in 

estate taxation could reduce lifetime charitable gifts.82

Table 7, below, documents that a substantial dollar value of charitable bequests are 

claimed annually. Over the past 15 years, more than one estate tax return in six has claimed a 

deduction for charitable bequests are claimed annually. Over the past 15 years, one estate tax 

return in six, or more, has claimed a deduction for charitable bequests. In 1999, the value of all 

charitable bequests claimed on estate tax returns exceeded $14.5 billion and represented 7.4 

percent of the aggregate value of the gross estates reported on those returns.

Table 7.--Number of Returns Claiming Charitable Bequests

and Value of Charitable Bequests, selected years

Year 1985 1990 1995 1999

Total number of estate 

tax returns filed............ 67,961 53,168 69,755 103,993

Number of returns with 

charitable bequest........ 11,713 9,709 13,039 17,559

Percentage of returns 

making charitable 

bequest......................... 17.2% 18.3% 18.7% 16.9%

Dollar value of 

bequests

(millions $).................. $4,543 $5,538 $8,695 $14,575

Bequests as percentage 

of gross estate .............. 7.2% 6.4% 7.4% 7.4%

Source: Joint Committee on Taxation staff tabulations from Internal Revenue Service Statistics of Income

data.

Federal transfer taxes and complexity

Critics of Federal transfer taxes document that these taxes create incentives to engage in 

avoidance activities. Some of these avoidance activities involve complex legal structures and 

can be expensive to create.83 Incurring these costs, while ultimately profitable from the donors’ 

 

82 Auten and Joulfaian, "Charitable Contributions and Intergenerational Transfers," 

attempted to estimate this more complex framework. Their findings suggest that reductions in 

estate taxation would reduce charitable contributions during the taxpayer's life.

83 Richard Schmalbeck, “Avoiding Federal Wealth Transfer Taxes,” in William G. Gale 

and Joel B. Slemrod, eds., Rethinking Estate and Gift Taxation, (Washington, D.C.: The 
40

and donees’ perspective, is socially wasteful because time, effort, and financial resources are 

spent that lead to no increase in national wealth. Such costs represent an efficiency loss to the 

economy in addition to whatever distorting effects Federal transfer taxes may have on other 

economic choices such as saving and labor supply discussed above. In the case of family-owned 

businesses, such activities may impose an ongoing cost by creating a business structure to reduce 

transfer tax burdens that may not be the most efficient business structure for the operation of the 

business. Reviewing more complex legal arrangements increases the administrative cost of the 

Internal Revenue Service. There is disagreement among analysts regarding the magnitude of the 

costs of avoidance activities.84 It is difficult to measure the extent to which any such costs 

incurred are undertaken from tax avoidance motives as opposed to succession planning or other 

motives behind gifts and bequests.

Federal estate taxes and State revenues

As explained in Part I, above, the State death tax credit acts as a revenue sharing 

provision with States that impose "pick-up" or "make-up" estate taxes. The State death tax credit 

effectively cedes revenue to those States that impose such taxes without increasing the aggregate 

tax burden imposed upon an estate. Repeal of the Federal estate tax would eliminate this source 

of revenue sharing. The burden of estate taxation would rest with the States.

All States and the District of Columbia impose estate, gift, or inheritance taxes. Most 

States impose only "pick-up" estate taxes. A few States also impose additional estate or 

inheritance taxes. In those States that impose only a "pick-up" estate tax, such taxes currently 

impose no incremental burden on the estate. With the repeal of the Federal estate tax, these taxes 

would now impose a burden on estates. This may create sentiment to repeal these State level 

taxes, but repeal of the State level taxes may require States to increase other taxes to make up for 

the loss of the implicit revenue sharing provided under present law.

Table 8, below, reports data related to the State death tax credit. In 1995, States collected 

$4.9 billion in estate and gift taxes85 on which estates claimed $3.0 billion in State death tax 

 

Brookings Institution), forthcoming 2001, reviews a number of widely used estate planning 

techniques.

84 Joint Economic Committee, The Economics of the Estate Tax, December 1998, has 

stated “the costs of complying with the estate tax laws are roughly the same magnitude as the 

revenue raised.” Smallbeck, “Avoiding Federal Wealth Transfer Taxes” disagrees writing 

“[a]bout half of the estate planners consulted in the preparation of this paper reported that they 

had rather standard packages that they would make available to individuals who would leave 

estates in the three to ten million range that might be provided for as little as $3000 to $5000.” 

See William G. Gale and Joel B. Slemrod, “Life and Death Questions About the Estate and Gift 

Tax,” National Tax Journal, 53, December 2000, pp. 889-912, for a review of the literature on 

compliance cost.

85 Scott Moody, editor, Facts & Figures on Government Finance, (Washington, D.C.: 

The Tax Foundation), 1999.
41

credits again the Federal estate tax. The $4.9 billion in State estate and gift taxes represented 

one-half of one percent of total State revenues in 1995. If Federal grants are removed from the 

State revenue, the $.9 billion in State estate and gift taxes represented seven tenths of one percent 

of State revenues from the States’ own resources.86 In 1999, estates claimed $6.1 billion in State 

death tax credits against the Federal estate tax.

Table 8.--Number of Returns Claiming State Death Tax Credit and Value of

State Death Tax Credit, selected years

Year 1985 1990 1995 1999

Total number of 

estate tax returns 

filed.................. 67,961 53,168 69,755 103,993

Number of returns 

claiming state death 

tax credit............ 33.060 27,334 37,087 57,068

Percentage of 

returns claiming 

state death tax 

credit................ 48.6% 51.4% 53.2% 54.9%

Dollar value of 

state death tax 

credit claimed 

(millions $)......... $1,078 $2,474 $3,016 $6,125

State death tax 

credit as a 

percentage of 

federal estate tax 

liability.............. 21.4% 27.5% 25.5% 26.7%

Source: Joint Committee on Taxation staff tabulations from Internal Revenue Service Statistics of Income

data.

 

86 Moody, Facts and Figures.
42

III. DESCRIPTION OF PROPOSALS

A. The President’s Fiscal 2002 Budget

On February 28, 2001, President George W. Bush released the Administration’s Fiscal 

2000 budget. Included in the Administration’s budget is a proposal to repeal the estate tax.87 

The details of the proposal have not yet been released.

B. S. 9, the “Working Family Tax Relief Act of 2001”

S. 9, the “Working Family Tax Relief Act of 2001,” was introduced by Senators Daschle, 

Baucus, Rockefeller, Conrad, Kerry, and others on January 22, 2001. In general, the bill would 

increase the amount of the unified credit effective exemption from $675,000 in 2001 (reaching 

$1 million in 2006 and thereafter) as follows: $1 million in 2002 through 2006; $1.125 million 

in 2007 and 2008; $1.5 million in 2009; and $2 million in 2010 and thereafter. The qualified 

family-owned business deduction “applicable deduction amount” of section 2057 also would be 

increased as follows: $1.375 million in 2002 through 2006; $1.625 million in 2007 and 2008; 

$2.375 million in 2009; and $3.375 million in 2010 and thereafter.

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

amount would continue to be coordinated as under present law so that, if an estate claims a 

qualified family-owned business deduction, its unified credit effective exemption amount would 

be limited to $625,000. If the qualified family-owned business deduction claimed by the estate 

is less than the maximum allowable deduction of $675,000, then the unified credit would be 

increased by the excess of the qualified family-owned business applicable deduction amount 

over the amount of deduction allowed, but not above the amount that would apply for the taxable 

year without regard to the qualified family-owned business deduction.

In addition, the bill would provide portability of any of the first spouse’s unused qualified 

family-owned business deduction. Under the bill, if an immediately predeceased spouse of the 

decedent has any unused qualified family-owned business deduction, the decedent generally 

could use such unused amount. This additional deduction would be limited to the amount of any 

unused qualified family-owned business deduction less the amount of any increase in the 

immediately predeceased spouse’s unified credit.

C. S. 31, the “Estate and Gift Tax Rate Reduction Act of 2001”

S. 31, the “Estate and Gift Tax Rate Reduction Act of 2001,” was introduced by Senator 

Campbell and others on January 22, 2001. In general, the bill would repeal estate, gift, and 

generation-skipping transfer taxes in the case of decedents dying and gifts and generationskipping transfers made after December 31, 2001, after which property received from a 

decedent’s estate would continue to receive a step up in basis. In the interim, all estate, gift, and 

generation-skipping transfer tax rates would be reduced by 5 percentage points each year from 

 

87

 A Blueprint for New Beginnings, A Responsible Budget for America’s Priorities, H. 

Doc. 107-45, p. 35.
43

2002 through 2011. The state death tax credit rates also would be reduced 1.5 percentage points 

per year from 2002 through 2011.

D. S. 35, the “Tax Cut With a Purpose Act of 2001”

S. 35, the “Tax Cut With a Purpose Act of 2001,” was introduced by Senators Gramm, 

Kyl, Miller and others on January 22, 2001. The bill contains several tax provisions. The estate, 

gift, and generation-skipping transfer taxes provisions in the bill generally would repeal estate, 

gift, and generation-skipping transfer taxes in 2009, after which property received from a 

decedent’s estate would continue to receive a step up in basis, which generally is a basis equal to 

the fair market value of the property on the date of the decedent’s death. In the interim, all 

estate, gift, and generation-skipping transfer tax rates would be reduced by 5 percentage points 

each year in 2002 through 2006, then by 10 points in 2007 and 2008.

E. S. 82, the “Estate and Gift Tax Repeal Act of 2001”

S. 82, the “Estate and Gift Tax Repeal Act of 2001,” was introduced by Senator Lugar 

and others on January 22, 2001. The bill would repeal estate, gift, and generation-skipping 

transfer taxes as of the date of enactment, after which property received from a decedent’s estate 

would continue to receive a step up in basis, which generally is a basis equal to the fair market 

value of the property on the date of the decedent’s death. The Treasury Secretary would be 

required to submit to the Congress within 90 days after the effective date a draft of any technical 

and conforming amendments necessary to reflect the changes in the Internal Revenue Code as a 

result of repeal of estate, gift, and generation-skipping transfer taxes.

F. S. 83, the “Estate and Gift Tax Phase-Out Act of 2001”

S 83, the “Estate and Gift Tax Phase-Out Act of 2001,” was introduced by Senator Lugar 

and others on January 22, 2001. The bill would repeal estate, gift, and generation-skipping 

transfer taxes in 2007, after which property received from a decedent’s estate would continue to

receive a step up in basis, which generally is a basis equal to the fair market value of the property 

on the date of the decedent’s death. In the interim, the unified credit effective exemption amount 

would be increased as follows: $1,000 in 2002, $1.5 million in 2003, $2 million in 2004, $2.5 

million in 2005, and $5 million in 2006. The Treasury Secretary would be required to submit to 

the Congress within 90 days after the effective date a draft of any technical and conforming 

amendments necessary to reflect the changes in the Internal Revenue Code as a result of repeal 

of estate, gift, and generation-skipping transfer taxes.

G. S. 84, the “Farmer and Entrepreneur Estate Tax Relief Act of 2001”

S. 84, the “Farmer and Entrepreneur Estate Tax Relief Act of 2001,” was introduced by 

Senator Lugar and others on January 22, 2001. The bill would increase the unified credit 

effective exemption amount to $5,000,000 in 2002 and thereafter.
44

H. S. 100, the “Death Tax Termination Act of 2001”

S. 100, the “Death Tax Termination Act of 2001,” was introduced by Senator Allard on 

January 22, 2001. The bill would repeal estate, gift, and generation-skipping transfers taxes with 

respect to estates of decedents dying and gifts and generation-skipping transfers made after 

December 31, 2000, after which property received from a decedent’s estate would continue to 

receive a step up in basis which generally is a basis equal to the fair market value of the property 

on the date of the decedent’s death.

I. S. 179

S. 179, was introduced by Senator Dorgan on January 25, 2001. In general, the bill 

would increase the amount of the qualified family-owned business deduction as follows: $2.375 

million in 2001, $4.375 million in 2002, $6.375 million in 2003, $8.375 million in 2004, and 

$9.375 million in 2005 and thereafter.

The bill also would increase the amount of the unified credit effective exemption as 

follows: $1 million in 2001 and 2002, $1.125 million in 2003 and 2004, $1.5 million in 2005, 

and $2 million in 2006 and thereafter.

Through 2005, the qualified family-owned business deduction and unified credit effective 

exemption amount would continue to be coordinated as under present law so that, under the 

proposal, if an estate claims a qualified family-owned business deduction, its unified credit 

effective exemption amount would be limited to $625,000. If the estate’s qualified familyowned business deduction is less than the applicable deduction amount, then the unified credit 

would be increased by the excess of the qualified family-owned business applicable deduction 

amount over the amount of deduction allowed, but not above the amount that would apply for the 

taxable year without regard to the qualified family-owned business deduction.

Beginning in 2006, the qualified family-owned business deduction and unified credit 

effective exemption amount would no longer continue to be coordinated so that, under the 

proposal, an estate would be allowed a separate deduction for qualified family-owned business 

interests as well as the maximum available unified credit effective exemption amount for the 

taxable year. For example, in 2006, an estate would be allowed a maximum qualified familyowned business deduction of $9.375 million and a maximum unified credit effective exemption 

amount of $2 million.

In addition, the bill would provide portability of any of the first spouse’s unused qualified 

family-owned business deduction. Under the bill, if an immediately predeceased spouse of the 

decedent has any unused qualified family-owned business deduction, the decedent generally 

could use such unused amount. This additional deduction would be limited to the amount of any 

unused qualified family-owned business deduction less the amount of any increase in the 

immediately predeceased spouse’s unified credit.

The bill would provide portability of any of the first spouse’s unused unified credit 

effective exemption amount. Under the bill, if an immediately predeceased spouse of the 
45

decedent has any unused unified credit effective exemption amount, the decedent generally may 

use such unused amount.

J. S. 275, the “Estate Tax Elimination Act of 2001”

S. 275, the “Estate Tax Elimination Act of 2001,” was introduced by Senators Kyl, 

Breaux, Gramm, Lincoln, and others on February 7, 2001. The bill would repeal estate, gift, and 

generation-skipping transfers taxes after the date of enactment, after which property received 

from a decedent’s estate generally would receive a carryover basis, which is the basis of the 

property in the hands of the decedent. An executor could “step up” the basis of a decedent’s 

property by adding to the basis of such property an additional $2.8 million, which is adjusted for 

inflation occurring after 2001. Such an addition to basis could not exceed the total fair market 

value of the decedent’s property. Property receiving a carryover basis generally would have its 

basis determined under the present-law gift tax carryover basis rules.

Executors would be required to furnish the Treasury Secretary with information 

regarding any basis adjustments made by an executor.