Choosing Between Gifts And Bequests:

How Taxes Affect The Timing of Wealth Transfers

by

David Joulfaian

U.S. Department of the Treasury

OTA Paper 86 May 2000

OTA Papers is an occasional series of reports on the research, models, and datasets developed 

to inform and improve Treasury’s tax policy analysis. The papers are works in progress and 

subject to revision. Views and opinions expressed are those of the authors and do not 

necessarily represent official Treasury positions or policy. OTA Papers are distributed in order 

to document OTA analytic methods and data and invite discussion and suggestions for revision 

and improvement. Comments are welcome and should be directed to the authors. 

Office of Tax Analysis

U.S. Department of the Treasury

Washington, DC 20220

david.joulfaian@do.treas.gov

___________ 

Len Burman, Mike Cooper, Laura Kalambokidis, Beth Kaufman, Michael Kuehlwein, Don 

Kiefer, Don Rousslang, Paul Smith, and Mark Wilhelm provided helpful comments on earlier 

drafts. 
Choosing Between Gifts And Bequests:

How Taxes Affect The Timing of Wealth Transfers

Abstract

A number of models have been advanced to explain the size and timing of transfers to 

children. One factor often overlooked is the effects of taxes on such transfers whereby 

parents, by comparing taxes on gifts to bequest taxes, may pursue a tax minimization strategy 

in timing their transfers. In this paper, I trace the tax rules that apply to gifts and bequests, 

and analytically derive the optimal conditions for each of the two modes of transfers. In 

addition, and using information on gifts reported on estate tax returns, I examine how taxes 

influence the timing of transfers by the very wealthy. The findings suggest that taxes are an 

important consideration in choosing between lifetime gifts and bequests. 
1. INTRODUCTION 

A number of factors may explain the size and timing of transfers to children. Parents 

may care about the well-being of their children (Becker, 1974). Alternatively, parents may 

give simply because they enjoy giving. Parents can also be strategic in the timing of their 

giving; they may time their transfers so as to extract services from their children not unlike 

those in Bernheim, Shleifer, and Summers (1985).1 One factor often overlooked, however, is 

the taxation of gifts and bequests, whereby parents may pursue a tax minimization strategy in 

the timing of transfers. 

The wealthy are likely to consider the income tax and estate and gift taxes, and 

compare the tax consequences of gifts to those of bequests, in allocating their wealth between 

inter-vivos gifts and testamentary transfers. Few economists, however, have examined the 

effects of estate and gift taxation on the timing of transfers.2 Fiekowsky (1959, pp. 188) 

explains how the wealthy may take advantage of differences between estate and gift tax rate 

schedules. Adams (1978) and Kuehlwein (1994) explore whether bequest and gift taxes are 

equalized in the timing of transfers. Poterba (1998) further makes the general case for the 

superiority of gifts, and empirically attempts to isolate their determinants.3 

The purpose of this paper is to examine the pattern of wealth transfers by the very 

wealthy. First, I analytically explore the conditions for the superiority of each of gifts and 

bequests. In comparing the advantages of one mode of transfer over another, I account for 

estate, gift, and capital gains taxes. In addition, and using information from estate tax 

records, I empirically explore whether taxes influence the allocation of transfers between 

1

 See McGarry (1999a), Altonji, Hayashi, and Kotlikoff (1997), and Wilhelm (1996) for a 

review of the literature. 

2

 In contrast, a growing body of the literature has examined the effects of estate taxation on 

charitable bequests (Boskin, 1976; Feldstein, 1977; Clotfelter, 1985; Joulfaian, 1991 and 

2000) and charitable gifts (Auten and Joulfaian, 1996). 

3

 McGarry (1999b) explores other aspects of gifts. Also see Bernheim (1987). 

1 
2

lifetime gifts and bequests.4 Individuals required to file estate tax returns roughly represent the 

top 1.5 percent of the population, and are typically under-represented in survey data.5 The 

results suggest that taxes are an important consideration in the timing of transfers. 

This paper is organized as follows. Section 2 provides a brief description of the federal 

estate, gift, and income tax treatment of transfers. Section 3 analytically traces the tax 

treatment of different modes of transfers. Section 4 numerically explores the conditions for 

the superiority of each of bequests and gifts. Section 5 provides some empirical evidence on 

the determinants of gifts. A concluding is provided in section 6. 

2. THE TAX TREATMENT OF TRANSFERS 

2.1. Bequest Taxes 

The federal estate tax was enacted in 1916, and applies to stocks, bonds, real estate, 

businesses, life insurance proceeds, and pension assets (exempt before 1982), among others. 

Estate expenses, outstanding debts, spousal bequests (limited to 50 percent of the estate prior 

to 1982) and charitable bequests are deductible in computing the taxable estate. The tax is 

computed by applying to the taxable estate a rate schedule that ranges from 18 to 55 percent, 

as shown in the left panel of Table 1. A surtax of 5 percent applies to taxable estates between 

$10 million and $17 million, which, as shown in Table 2, has the effect of creating a marginal 

tax rate of 60 percent.6 

The tax is reduced by a number of credits in computing the final tax liability. The 

largest tax credit is the unified credit set at a value of $211,300 in 1999, equivalent to an 

4

 I focus on transfers other than those related to education and medical expenses, as well 

those in excess of the annual exemption ($10,000) under the gift tax. 

5

 The projected net worth of such individuals in 1992 is $5 trillion, of which $1.5 trillion is 

in corporate equity (Johnson, 1998). The comparable figures from the Flow of Funds for the 

household (and nonprofit) sector are $23 trillion and $2.9 trillion, respectively. 

6

 For an overview of historical developments and a more detailed description of estate and 

gift taxes, see Joulfaian (1998). 
3

exemption of $650,000 ($600,000 for the years 1987-1997).7 This has the effect of raising the 

lowest estate tax rate to 37 percent, as shown in column 1 of Table 2. The second largest 

credit is that for state death taxes. The credit rate ranges from 0 to 16 percent of the federal 

taxable estate, as shown in the right panel of Table 1, and has the effect of reducing the 

maximum statutory federal estate tax rate to 39 percent.8 

In the case of estates where the value of closely held businesses exceeds 35 percent of 

terminal wealth, the portion of the estate tax liability attributable to the business can be paid in 

installments over a period of 14years, with no principle payable in the first 5 years. The 

interest rate is set at 45 percent of the applicable interest rate, which is defined as the short 

term applicable federal rate (AFR) plus three percentage points. At an interest rate of 8 

percent, for instance, the estate is charged an interest rate of 3.6 percent only, which 

effectively reduces the estate tax liability for the wealthiest estates by about 30 percent, using a 

discount rate of 8 percent.9 In addition, and beginning in 1998, estates with closely held 

businesses such as family owned businesses with a value that exceeds 50 percent of the 

adjusted gross estate may deduct up to $675,000 of such interest.10 

7

 The unified credit is scheduled to increase to $345,800 in 2006, equivalent to an 

exemption of $1 million (see left panel of Table 1). 

8

 The estate tax also provides the heirs with a credit for estate taxes paid in the previous 10 

years. If the heir dies within 2 years, for instance, his estate will receive a tax credit equal to 

100 percent of the tax paid on the inheritance he had received; 80 percent for 3-4 years, 60 

percent for 5-6 years, 40 percent for 7-8 years, and 20 percent for 9-10 years. This credit is 

especially valuable in the case of transfers to those with short life expectancies such as older 

generations. Such transfers, however, seldom take place (Joulfaian, 1994). 

9

 The interest rate charged on the tax liability attributable to the first million dollars of 

taxable estate is set at 2 percent, which reduces the effective tax rate by 40 percent when also 

using a discount rate of 8 percent. 

10 The combined deduction and exemption by virtue of the unified credit cannot exceed 

$1,300,000. 
4

In addition, closely held businesses may exclude up to $750,000 of real property used 

in business or farming.11 The exclusion applies to the difference between the fair market value 

and the value of the property in its current business or farm use. Taxpayers may also take 

advantage of valuation discounts for minority interest in a property, lack of marketability, or 

blockage (the adverse effect on the value if large blocks of corporate stock or art collections 

were sold to pay the estate tax). These valuation discounts are on average about 30 percent. 

2.2. Gift Taxes 

The federal gift tax was first enacted in 1924, repealed in 1926, re-enacted in 1932, 

and modified over the years in an attempt to reduce estate and income tax avoidance by 

initiating inter-vivos gifts. In 1976, statutory gift tax rates were raised to the level of estate 

tax rates, and the gift tax was integrated with the estate tax, sharing a common tax rate 

schedule, and unified credit. The tax is computed annually by applying the tax rate schedule 

to all gifts made during life, with a credit for previously paid gift taxes. An unlimited 

exemption applies to gifts of tuition and medical expenses, in addition to an annual exemption 

of $10,000 per donee.12 

A unique feature of the gift tax is that it applies on a tax exclusive basis. To illustrate 

the implications of this, consider an individual with tax rate of 0.5 and wealth of $300. He 

transfers $200 to his child and pays $100 in gift tax, for total transfers of $300; the effective 

tax rate is 0.33, or 100/300, and not 0.5 as under the estate tax where the tax liability would 

be $150. Also in contrast to the estate tax, it does not provide a credit for state taxes or the 

installment method to pay gift taxes. 

Valuation practices are particularly favorable in the treatment of transfers of businesses. 

Transfer of a minority interest in a business may be accorded minority discounts which 

typically reduce the applicable gift tax by about a third. These lifetime transfers may also put 

the donor in a position to claim a minority position and additional discounts at death. 

11 This exclusion is indexed for inflation beginning in 1998. 

12 This exemption is indexed for inflation beginning in 1998. 
5 

2.3. Income Taxes 

The income tax treatment of transfers varies as well. In the case of bequests, accrued 

gains escape capital gains taxation as the donor’s basis in assets is stepped up to the value at 

death. In the case of the gift tax, the beneficiary retains the donor’s basis. However, this basis 

is increased (stepped up) by the amount of gift tax paid on the accrued gains component of the 

asset transferred.13 In addition, the donor may have to pay capital gains taxes on assets 

liquidated to pay the gift tax. In contrast to the gift tax, liquidating assets to pay the estate tax 

does not usually trigger capital gains taxes since the basis is stepped up. 

3. THE PRICE OF TRANSFERS 

Consider very wealthy parents, likely to be subject to the maximum tax rate of 0.55, 

who wish to transfer wealth V to their children. They may transfer these assets during life as 

gifts or bequeath them at death. Each of these two modes of transfers has its own tax 

consequences. These are analytically traced below. 

3.1. The Taxation of Gifts 

When making a gift of cash, a donor, with wealth V and statutory tax rate Jg, faces gift 

taxes of TG, 

TG = t g (V - TG ) (1) 

or, 

t 

TG = 

g

V (1') 1 + t g 

where the effective tax rate is less than the statutory tax rate as gifts are taxed on a tax 

exclusive basis. 

In the case of the wealthy, who hold very little of their assets in the form of cash, the 

treatment of transfers is more complicated. When wealth is in the form of appreciated assets, 

13 Prior to 1977, the basis was stepped up by the full amount of the gift tax. 
6 

such as stocks, real estate, and business assets, then capital gains taxes may apply in addition 

to gift taxes. The donor (donee) pays the gift tax by selling a fraction of the asset, which also 

results in capital gains tax TD. The latter is defined as:

TD = t c b (TG + TD ) (2) 

or, 

t bc TD = 

1 - t b TG (2') 

c 

where Jc is the capital gains tax rate, and $ is the appreciation component or accrued gains 

G

G -TD. The tax is defined as: 

share of the asset. The gift tax paid, T , depends on the applicable gift tax rate, Jg, and the 

amount received by the beneficiary, V-T

T G = t g (V - T G - T D ) (3) 

or, 

t 

TG = 

g 

t c bt g

V 

(3') 1 + t + g 1 - t bc 

Capital gains taxes, TB, may apply at the disposition of the assets by the beneficiaries, 

n years in the future. These taxes apply to gains accrued by the donor in the past, and gains 

accrued by the donee over n years. As stated earlier, the donee retains the donor’s basis 

adjusted for gift taxes. The adjustment is equal to the amount of the gift tax attributable to the 

amount of gains accrued by the donor, $TG. More specifically, the present value of future 

capital gains taxes is defined as: 

n t c [b (V - TG - TD ) - b TG ] t c (V - TG - TD )[(1 + p ) - 1] TB = n + n (4) (1 + d ) (1 + d ) 
7 

or, using (2') and (3'), 

t c b (1 - t g ) t c [(1 + p ) n - 1]

n + n 

T = 

(1 + d ) (1 + d ) V (4') B t bt 1 + t + c g 

g 1 - t bc 

where B is the rate at which the asset appreciates, and * the discount rate. The first term 

measures the capital gains tax on gains accrued by the donor and the second term the tax on 

gains accrued by the beneficiary. 

The combined sum of capital gains and gift taxes is TD+TG+TB, or: 

� +

t c bt g 

+

t c b (1 - t g ) 

+

t c [(1 + p ) n - 1] � � t � g n n

� 1 - t c b (1 + d ) (1 + d ) � GIFTAX = � t b t � V (5) 

� 1 + t + c g � Ł g 1 - t b ł c 

It follows that the true gift tax rate, the bracketed term in (5), reflects the statutory gift tax 

rate, the capital gains tax rate, the appreciation rate, the discount rate, and the holding period 

n. Note that if the donor dies within 3 years, the gift tax itself becomes taxable under the

estate tax, for an additional tax of JeTG

tax exclusive basis. GIFTAX becomes,

, and gifts lose much of the benefit of getting taxed on a 

� t c bt g t c b (1 - t g ) t c [(1 + p )

n - 1] t e t g � � t + + + + � g n n n

� 1 - t c b (1 + d ) (1 + d ) (1 + d ) � GIFTAX = � t b t � V (5') 

� 1 + t + c g � Ł g 1 - t b ł c 
8 

The present value of the after-tax gift available to the beneficiary is defined as: 

n 

GIFT = (V - TG - TD ) 

(1 + p )

n - TB - t eTG n (6) (1 + d ) (1 + d ) 

where the first term reflects the value of the gift received by the donee, enhanced by taxdeferred appreciation at the rate B, and reduced by future capital gains and estate taxes. This 

can be re-written as: 

n n (1 + p ) - t c b (1 - t g ) - t c [(1 + p ) - 1] - t e t g

GIFT = t c bt gV (6') n (1 + d ) (1 + t g + 

1 - t b ) c 

where the last term in the numerator drops when n>3. The donee receives GIFT at a cost of 

V to the donor. Thus, the tax price of a transfer is V/GIFT, or: 

t bt n c g

(1 + d ) (1 + t g + 

1 - t b ) V (7) c P = = G n n GIFT (1 + p ) - t c b (1 - t g ) - t c [(1 + p ) - 1] - t e t g 

3.2. The Taxation of Bequests 

If these assets were to be transferred at death instead, m years into the future, then, 

using tax rate Je, the present value of the estate tax due would be: 

m t eV(1 + p ) TE = m (8) (1 + d ) 

which reflects the tax-free appreciation in assets at the rate B. No additional taxes apply if the 

heirs immediately sell the assets. After-tax bequests are 
9 

m (1 - t e )V(1 + p ) BEQ m = 

(1 + d ) (9) 

at a cost of V to the donor. The tax price of bequests can be stated as: 

m V (1 + d ) PB = = m (10) BEQ (1 + p ) (1 - t e ) 

similar to that in Boskin (1976). 

4. COMPARING GIFTS AND BEQUESTS 

To facilitate the comparison between gifts and bequests, I set m=n; heirs sell assets 

immediately after death. The donor will choose bequests over lifetime gifts as long as 

GIFT<BEQ, or PB<PG, up to the point where the two are equalized. Assuming n>3, and 

using (6) and (9), or (7) and (10), define the ratio of after-tax bequests to after-tax gifts, or the 

relative price, as: 

n BEQ PG (1 - t e )(1 + p ) = = n n GIFT PB (1 + p ) - t c b (1 - t g ) - t c [(1 + p ) - 1] 

t bt (11) 

1 + t + c g 

g 1 - t bc 

When the asset transferred is cash, and the beneficiaries continue to hold cash, equation (11) 

simplifies to (1+Jg)(1-Je). 

From (11), we observe that the discount term drops out; the relative price would be 

identical regardless of whether all streams are discounted to the present or compared using 

their future values in year n. The advantage of one mode of transfer over another critically 

depends on the values of the various parameters in (11). Bequests are preferable to gifts when 

this ratio exceeds one, as the inheritance received by the heirs will exceed the after-tax gifts 
10 

received. It can be easily demonstrated that the advantages of bequests rise with capital gains 

and gift tax rates, and decline with the estate tax rate. More formally, and as shown in 

appendix A, we should expect the relative price of gifts to rise with capital gains and gift 

taxes, and decline with the estate tax; M(BEQ/GIFT)/MJc=M(PG /PB)/MJc>0, M(PG /PB )/MJg>0, 

and M(PG /PB )/MJe<0. This is further illustrated in Figure 1, which assumes n=20, $=0.5, 

and B=0.08. 

4.1. Basic Comparisons 

To numerically compare the advantages of bequests over gifts, I assume that assets 

appreciate at the rate B=0.08. The capital gains tax rate is set at Jc= 0.25, which 

approximates the combined state and federal tax rates. Federal estate and gift tax rates are set 

at 0.55, or Je=Jg=0.55. When the computed ratio in (11) equals one, estate and gift tax 

prices are equalized; bequests are preferable to gifts when it exceeds one, and when it is less 

than one, gifts are preferable. 

Table 3A reports values for the relative price of gifts, or the ratio of BEQ to GIFT, for 

values of $ ranging from 0 to 1, with values of n ranging from 0 to 40 years. As 

demonstrated, the advantages of making bequests, or gifts, depend on the size of accrued gains 

and the length of n. Gifts are generally preferable, but their desirability diminishes with the 

size of accrued gains, $, and n. 

Capital gains taxes, and as already demonstrated in Appendix A and Figure 1, go a 

long way in bridging the gap between the tax treatments of gifts and bequests. Table 3B 

replicates the figures in Table 3A but sets the capital gains tax rate to zero (Jc=0). The 

reported relative price or the ratio of after-tax bequests to after-tax gifts (BEQ/GIFT) drops 

across the board by as much as a third. Except in the rare case of instant death, n=0, gifts are 

by far superior. 

4.2 State Gift Taxes 

The comparisons reported in Table 3A do not account for state gift taxes. The majority 

of states either never enacted gift taxes or had them repealed many years ago. Only 6 states 
11

taxed lifetime gifts in 1999. These rates, as reported in Table 4A, range from 3 percent in 

Louisiana to 21 percent in New York.14 In contrast to the estate tax, and as discussed earlier, 

the federal gift tax does not offset these state taxes by a credit. In the case of state estate and 

gift tax rates of 16 percent, for instance, the combined state and federal statutory gift tax rate 

is 0.71, or 0.55 + 0.16, while the estate tax rate is 0.55, or (0.55+0.16)-0.16. 

Table 4 reports the ratio of after-tax bequests to gifts using state gift tax rate of 0.16 

and estate tax rate of 0.031, which are equal to the wealth weighted average maximum tax 

rates in the six states.15 Not surprisingly, state gift taxes, by increasing the cost of gifts, make 

inter vivos transfers less attractive than the base case reported in Table 3A. While these 

results would vary from state to state, depending on the tax rates in place, the same tendencies 

should be observed; state gift taxes reduce the attractiveness of gifts. However, the effect of 

these taxes is only relevant for the residents of six states, at least in 1999. 

4.3 The dynamics of Inter-Spousal Transfers 

The dynamics of spousal transfers are of special interest as about one third of the 

terminal wealth of the wealthiest of decedents is bequeathed to surviving spouses.16 Because of 

differences in the tax treatment of transfers to spouses and children, and as an alternative to 

gifts, a parent may bequeath wealth to his widow and pay any applicable estate taxes. In turn, 

the surviving spouse immediately gives the assets to her children and pays the applicable gift 

tax, but avoids capital gains taxes as the basis in the underlying asset is stepped up. Under this 

strategy, the tax is: 

14 Also included are the states of South Carolina and Wisconsin which repealed their gift 

taxes effective in 1992. 

15 Wealth data for each of the six states are obtained from Eller (1997, Table 5, column 2). 

These six states account for about 17 percent of the national terminal wealth reported on estate 

tax returns. 

16 See Joulfaian (1998, n. 44). 
�

� 

�

� 

12 

� t � g n �

� t e + (1 - t e )

1 + t g ł

�

� V(1 + p ) (14) Ł T = E,W n (1 + d ) 

Under current law, married couples can take advantage of preferential tax rules that 

apply to spousal transfers. In the presence of the unlimited marital deduction (Je=0), which 

was enacted in 1981, and because assets get stepped up at death (Jc=0), it is optimal for a 

parent to bequeath his wealth to his spouse who in turn immediately gives it to her children. 

The tax on such bequests is: 

� t � g n 

Ł 1 + t g ł

�

� V(1 + p ) (15) 

T = E,W n (1 + d ) 

and her children get to keep 

� 1 � n 

Ł 1 + t g ł

�

� V(1 + p ) (16) 

BEQW = 

(1 + d ) n 

To evaluate the superiority of this mode of transfers over gifts, I divide BEQW by GIFT and 

report the results in Table 5. As with the earlier Tables, a value exceeding one shows that the 

heirs are better off by having gifts deferred and transferred by the surviving spouse. Table 5 

demonstrates that, regardless of n and $, this strategy should dominate the lifetime giving by 

married couples; BEQw>GIFT. This entire scheme, however, hinges on the cooperation of 

the surviving spouse. 
13 

The advantages of this strategy are potentially even greater in community property 

states.17 When an individual dies holding community property, the surviving spouse receives a 

stepped up basis not only on the share of the property “owned” by the deceased spouse, but 

also on the share of the property already attributable to the surviving spouse.18 The surviving 

spouse is able to transfer her own assets free of capital gains taxes. 

4.4. Transfers of Closely held Businesses 

A. Transfers of Fractional Interests 

As mentioned earlier, valuation discounts may apply to transfers of businesses. These 

may reflect lack of control and lack of marketability, as well as blockage. These discounts, 

which are generally in the range of 30 percent, have the effect of reducing the effective estate 

and gift tax rates. In the case of bequests, however, such discounts may subject heirs to future 

capital gains taxes (TF) on gains not stepped up. The amount of this additional tax is equal to: 

n t c fV(1 + p ) TF = n (17) (1 + d ) 

where f is the fraction of wealth that escapes estate taxation. The combined taxes on bequests 

is TE+TF, which, using (9) and (17), yields after-tax bequests of:19 

n (1 - t e - t c f)(1 + p ) BEQ F = 

(1 + d ) n V (18) 

17 Community property states are Arizona, California, Idaho, Louisiana, Nevada, New 

Mexico, Texas, and Washington. 

18 See Code Section 1014(b)(6). 

19 The estate tax rate should be defined as Je(1-f). For presentation purposes, I use Je to 

reflect the effective tax rate net of discounts. A similar treatment is extended to the gift tax. 
14

The individual may transfer all wealth during life, all at death, or some combination. To 

simplify the presentation, I assume that the individual chooses between fractional transfers of 

the entire business during life and lump sum bequests. In either case, I assume a valuation 

discount (f) of 30 percent applies, which reduces statutory estate and gift tax rates to 

Je=Jg=0.385. 

Table 6A reports values for the ratio of bequests to gifts. The estimates show that 

bequests are generally superior to gifts for all values of $ and n. This outcome should not be 

surprising since capital gains taxes on gifts become more important at lower estate and gift tax 

rates. Because discounts may not always be available at death, as an alternative strategy, for 

instance, one may engage in lifetime transfers of fractional business interests to be able to take 

advantage of minority discounts both on gifts and on the residual assets at death. Under these 

circumstances, a strategy of giving in life and at death may dominate. 

B. Deferral of Estate Tax 

Unlike the gift tax, the estate tax may be paid in installments over a period of 14 years 

at below market interest rates. If we set the individual discount rate at the applicable Federal 

interest rate of say 8 percent, then the present value of the stream of future payments is 

approximately equivalent to 70 percent of the statutory estate tax liability, and has the effect of 

reducing the statutory estate tax rate Je from 0.55 to 0.383. However, given our assumptions 

in deriving equation (11), whereby assets are disposed of at the date of death, taxpayers will 

not benefit from this deferral of tax and the results reported in Table 3A will hold (Je=0.55).20 

Since some of these businesses are likely to remain in the family for a number of years, 

I relax the above assumptions, and assume that the donor dies in year m and the heirs dispose 

of the assets in year n, where m#n. It follows that additional capital gains taxes may apply on 

gains accrued between the date of death (m) and the date the assets are disposed of by the heirs 

(n), and equation (9) is re-written as: 

20 Sale triggers acceleration of remaining payments. However, the estate may continue to 

benefit from the deferral of tax so long as the heirs do not dispose of (withdraw) 50 percent or 

more of the interest in the business transferred. See Code Sec. 6166(g)(1). 
15 

n- m n -m � (1 + p ) t c [(1 + p ) - 1]� m BEQ BUS = (1 - t e )V(1 + p ) Ł

� (1 + d ) n - (1 + d )

n ł

� (19) 

The last term in (19) measures the appreciated value of after-tax bequests through period n 

reduced by capital gains taxes on gains accrued over the years n-m. 

To compare after-tax bequests in (19) to after-tax gifts in (6), I assume that the heirs 

continue running the business and the assets are disposed of 20 years after the date of death; 

n-m=20.21 The ratio of the two transfers are reported in Table 6B which shows that, when 

accrued gains are sizeable, gifts are inferior to bequests almost at every point in time. 

Closely held businesses may combine the benefits from deferral of the estate tax and 

valuation discounts. This may result in a lower effective estate tax rate (Je.0.27), and 

bequests will be preferable to gifts at every point in time. It should be noted, however, that 

few estates benefit from the deferral provision. Of the 60,000 estates of decedents filing tax 

returns, out of over two million adult decedents in 1992, only 716 estates opted to pay the 

estate tax in installments (Eller, 1997); few decedents seem to leave behind interests in closely 

held businesses that exceeds 35 percent of terminal wealth. 

5. EMPIRICAL EVIDENCE 

Consider the case of parents who wish to transfer wealth W to their children. They 

choose how to allocate this wealth between gifts and bequests so as to maximize their utility, 

U(G, B). This is maximized subject to the budget constraint that the sum of expenditures on 

gifts and bequests do not exceed wealth, W, or: 

PG G + PBB £ W

From the first order conditions, it follows that wealth is allocated between gifts and bequests at 

the point where the marginal rate of substitution is equal to the relative price, or: 

21 Qualitatively similar results are obtained when n-m is set to a value different from 20. 
PG 

16 

U G 

= 

U B PB 

In this very simple framework, the share of wealth transferred during life is directly 

determined by the relative price of gifts, as defined in equation (11). The challenge here is to 

obtain data that provide information on transfers during life and at death, and contain sufficient 

information to construct the price measure. 

5.1 Data Sources 

To empirically verify the effects of taxes on the mode of transfers, I employ data drawn 

from the estate tax returns of decedents in 1989. The sample is limited to the estates of 

parents with total assets in excess of $600,000, the filing threshold in 1989. Estate tax returns 

provide information on wealth and its composition. Information is available on assets held, 

debts, funeral expenses, and expenses of settling the estate such as attorney fees, and executor 

commissions. They also provide information on the cumulative amount of lifetime taxable 

gifts made through 1989. These gifts are transfers in excess of the annual exclusion, and do 

not include payments for education and medical expenses, all of which are tax free. 

Demographic information is available on age of the decedent, marital status, gender, number 

and relationship of beneficiaries, and state of residency. I exclude observations with negative 

net worth and those under age 40. 

Wealth is defined as the maximum amount that can be transferred, and is measured as 

net worth at death less life insurance proceeds and estate expenses, plus lifetime gifts and gift 

taxes. Business ownership is measured as the fraction of the estate in the form of farm, 

noncorporate businesses, and closely held corporate stock. 

For each individual, the marginal federal estate tax rate is computed by adding $1,000 

to wealth using 1987 law and assuming all wealth is transferred to the children at death. 

Conversely, the marginal federal gift tax rate is computed assuming all wealth is transferred 

during life. The federal capital gains tax rate is set equal to the maximum statutory rate of 

0.28 in 1987. 
17

Federal tax rates are augmented with state estate, gift, and capital gains tax rates also in 

effect in 1987.22 For each of the 50 states and the District of Columbia, I compute the estate 

tax rate net of the federal credit for state death taxes. All jurisdictions tax bequests as they set 

the federal credit as their minimum tax. In 1987, twenty-five states employed a “pick-up” tax 

where the state tax liability is set equal to the maximum available federal tax credit as 

described in the right panel of Table 1.23 The net tax rate for these jurisdictions is zero. 

Seven states levied their own estate taxes, while the remaining 19 states levied inheritance-type 

taxes. Appendix B provides the tax rate schedule for these states, before applying the federal 

credit, while Appendix C provides the gift tax rate schedule in effect in seven states.24 The 

capital gains tax rate is set equal to the maximum tax rate in effect in each of the 51 

jurisdictions. These are reported in Appendix D and reflect those in Bogart and Gentry 

(1995). The combined federal and state tax rate is computed as 0.28 + (1-0.28)J, which 

accounts for the deductibility of state income taxes. 

A common problem encountered in studies of the effects of taxes on economic behavior 

is how to identify the tax price effects separately from the effects of income(Feenberg, 1987), 

or wealth in this case. This problem arises because the marginal tax rate can be determined by 

other regressors, wealth in particular, which confounds the measurement of tax effects. The 

issue at stake is whether the estimated coefficient on the tax price truly captures the tax effects 

or does it also reflect the wealth effects as well; this problem is especially onerous in the case 

of cross-sectional data. To overcome this identification problem, I use the combined 

22 The results reported below are little affected when 1989 law, the year of death, is used. 

23 These states are Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of 

Columbia, Florida, Georgia, Hawaii, Illinois, Maine, Minnesota, Missouri, Nevada, New 

Mexico, North Dakota, Oregon, Texas, Utah, Vermont, Virginia, Washington, West Virginia, 

and Wyoming. 

24 The taxable estate and gifts ranges are stretched to accommodate the schedules of the 

various state. Both estate and gift tax schedules are obtained from the Advisory Commission 

on Intergovernmental Relations (1987, p. 71). The rate schedule for taxable estates under 

$300,000, and the applicable estate and gift exemptions, are not reported. 
18

maximum federal and state statutory estate and gift tax rates to construct a tax price 

instrument. 

The computed tax rates are incorporated in equation (11) to compute the relative price 

of gifts. This measure, however, is likely to be sensitive to the composition of wealth. If 

wealth is mostly cash or equivalent, then $=Jc=0. Thus, the price is computed as a weighted 

average price of cash and noncash transfers using portfolio shares as weights.25 For non-cash 

assets, the share of accrued gains ($) is set equal to 0.5.26 Furthermore, assets are assumed to 

appreciate at the rate B=0.08 over individual life expectancies. 

5.2. Basic Statistics 

Table 7 provides sample statistics for select variables. For the sample of 2355 estates, 

we observe mean wealth of $11 million, with a standard deviation of $23.5 million. The mean 

gift is $0.3 million, which represents about 2 percent of wealth.27 The average age is 77.6 

years, measured at 1987 levels, with 45 percent of the individuals widowed. Estate and gift 

tax rates are about 50 percent, and the capital gain tax rate is 31 percent; the average tax price 

is 0.88. On average, business assets represent about 13 percent of the gross estate. 

Columns 2 and 3 of Table 7 provide similar statistics for those with and without gifts. 

About 60 percent of the sample, or 1,428 estates, did not report lifetime gifts. The mean 

wealth is $8 million. On average, these individuals are 74.5 years old, with 41 percent 

widowed. In contrast, those who reported gifts are much wealthier and slightly older. The 

25 Ideally, the share of assets in the estate plus those transferred during life should be used. 

The assets composition of the latter, however, is not observed. 

26 This is based on data from long-term gains realized in 1985 (Auten and Wilson, 1999, 

pp. 125). Following a tax minimization strategy, as in Balcer and Judd (1987), individuals 

may sell assets with high basis and hold those with low basis until death. Thus $ is likely to 

be larger in the case of assets not traded. The estimated effects are slightly larger when higher 

values of $ are employed. 

27 Recall that these gifts are in excess of the annual exclusion ($10,000) and do not include 

transfers to cover medical and education expenses. 
19 

mean wealth is $15 million with mean age of 77.4 years. The average gift is about $0.75 

million, with a ratio of gifts to wealth of 5.2 percent. They face slightly higher estate and gift 

tax rates and slightly lower capital gains tax rates. The relative price of gifts is 0.85, smaller 

than the price of 0.93 for non-donors. Little variation is observed in the business share of 

wealth. 

Table 8 provides further detail on the pattern of gifts disaggregated by size of wealth. 

The top panel shows the pattern of giving and the associated attributes of donors. The average 

gift rises with wealth, but without a clear pattern for the fraction of wealth transferred. Estate 

and gift tax rates peak, and the relative price hits a low, at wealth levels between $10 and $20 

million, roughly the bubble range. Also business ownership generally seems to rise with 

wealth. 

When compared to the tabulations in the middle panel, donors are more likely to be 

widowed, and are slightly older. They face higher gifts tax rates, but also face higher estate 

tax rates with slightly lower capital gains rates. More importantly, donors face lower prices in 

every wealth group. 

Turning to all individuals in the sample, the bottom panel of Table 8 shows that the 

relative frequency of gifts rises with wealth. In addition, both the amount and the fraction of 

wealth transferred during life rise with wealth, consistent with the top panel of Table 8. 

These figures also show the share of business assets to rise with wealth. 

Both Tables 7 and 8 show that those who make lifetime gifts face lower prices of gifts. 

Table 9 provides further evidence on the effects of the tax price on the probability of making 

gifts. It breaks down the sample by size of the relative price of gifts, ranging from a price 

below 0.75 to a price above 1.10. Over half of those who face a price below 0.8 provide for 

lifetime gifts. This fraction gradually declines to a low of 6 percent when the price is over 

1.10, a pattern consistent with a tax minimization strategy. 

5.3. Multivariate Analyses 

I resort to multivariate analysis to shed further light on the determinants of gifts and 

gauge the effects of taxes. I estimate generalized and FIML Tobit equations to explore the 
20 

determinants of lifetime gifts, and report the results in Table 10. While the tax price is the 

primary variable of interest, the explanatory variables also include wealth, marital status, age, 

number of children, and business ownership. 

Beginning with generalized Tobit, column 1 of Table 10 provides Probit IV estimates, 

where the price instrument is constructed using the maximum state and federal estate and gift 

tax rates. The estimates show that the probability of making gifts rises with wealth. The 

estimated coefficient is 0.41 with a corrected standard error of 0.04. This suggests that the 

probability of making a gift rises by 0.15 percentage points for every one percent increase in 

wealth. 

Married parents are less likely to engage in lifetime transfers than their widowed 

counterparts, consistent with the basic statistics in Tables 7 and 8. The estimated coefficient is 

-0.3 with standard error of 0.06. When compared to widowed individuals, the probability of 

making gifts is 11 percentage points lower. This pattern is consistent with the tax 

minimization strategy suggested in Table 5. However, it is not clear whether parents are 

engaged in a tax minimization strategy or just that married couples have an additional heir. 

The estimated coefficient on the number of children is positive but not precisely 

measured. Those under the age of 55 are less likely to give than their older counterparts. 

Otherwise, age has no significant effect on giving. Business ownership also has a positive, 

albeit imprecisely measured, effect on giving. 

The probability of reporting gifts declines with the relative tax price, consistent with a 

tax minimization strategy. The estimated coefficient is -0.97 with a standard error of 0.40. 

The marginal effect is -0.36; for every one percent increase in the relative price, the 

probability of making gifts drops by 0.36 percentage points. 

The second column of Table 10 reports 2SLS estimates of the level of gifts, augmented 

with the inverse mill’s ratio with corrected standard errors. The share of wealth transferred 

during life rises with wealth, but the estimated coefficient is not precisely measured consistent 

with the pattern reported in the top and bottom panels of Table 8. Gifts are greatest for 

widowed individuals. Conditional on positive gifts, the fraction of wealth transferred is five 
21 

percentage points lower for married individuals. Business ownership seems to have little effect 

on giving. 

The estimated coefficient on the price of gifts is -0.2 with a standard error of 0.07; the 

implied elasticity with respect to the price is -3.9, evaluated at mean values. For the most 

part, these findings are reinforced in the FIML Tobit estimates reported in the last column of 

Table 10. The estimated coefficient on price is -0.13 (se=0.04), which implies a price 

elasticity of -2.1. 

A. Alternative Estimates 

A primary assumption in the above estimates is that parents choose between 

transferring their wealth to their children during life and at death. No allowance is made for 

inter-spousal transfers or the consumption of wealth by the surviving spouse. The latter may 

reduce the size of wealth available for intergenerational transfers, and lead to an erroneous 

measure of the tax price. As a robustness check on the estimates, and their sensitivity to the 

treatment of spouses, Table 10 is reproduced by excluding married individuals from the 

sample. For the sub-sample of 1,055 widowed individuals, the estimated coefficients on the 

price are -1.10 (se=0.67) in the Probit IV, -0.24 (se=0.09) in the 2SLS, and -0.19 (se=0.07) 

in the Tobit equation. These estimates are fairly similar to those reported in Table 7. 

The earlier estimates in Table 10 are potentially biased if some individuals have 

changed their state of residence. In this case, an individual may have made gifts in one state 

but died in another state. In a typical example, consider the case of a New York resident, a 

state with a gift tax in the sample period, who makes lifetime gifts and then retires to sunny 

Florida, a state without a gift tax. The data would show a Florida resident to have made 

lifetime gifts and lead to an erroneous measure of the gift tax. As a test of the robustness of 

the above results, I exclude estates with reported Florida residency. The estimated coefficient 

on the price becomes -1.0 (se=0.44) in the Probit IV, -0.20 (se=0.09) in 2SLS, and -0.13 

(se=0.04) in Tobit, virtually identical to those reported in Table 10. 

The estimated equations in Table 10 are further replicated by replacing the relative 

price of gifts with the maximum gift tax rate. The estimated coefficients on the tax rate are -
22 

0.753 (se=0.379) for the Probit criterion equation, -0.106 (se=0.06) for the level equation, 

and -0.074 (se=0.035) for FIML equation, respectively. Using the maximum capital gains tax 

rate instead yields -5.0537 (se=0.1346), -0.2955 (se=0.2129), and -0.4007 (se=0.102), 

respectively. These estimates, which ignore life expectancies and the interaction between the 

various taxes implicit in (11), are qualitatively similar to those reported in Table 10. 

B. Some Simulations 

Using equation (11), I employ the parameters from Table 10 to simulate the effects of a 

number of tax regimes. First, I set estate, gift, and capital gains tax rates to their maximum 

values under current law, or 0.55, 0.55, and 0.25. I assume a time horizon of 20 years 

(n=20), $=0.5, and use the sample mean cash share of wealth of 0.28. The estimated 

elasticities suggest that if gifts were to be taxed on a tax inclusive basis, lifetime transfers 

would decline by 75 percent using FIML estimates, and eliminate them altogether using 2SLS 

estimates. This would also require setting the gift tax rate to 1.22, which is equivalent to an 

estate tax rate of 0.55 on a tax inclusive basis. While this regime equalizes estate and gift 

taxes, capital gains taxes continue to apply in the case of gifts. 

As an alternative, I consider taxing capital gains at ordinary rates (Jc= 0.45). As 

demonstrated earlier, this change raises the price of gifts as it reduces the benefit of taxing 

gifts on a tax exclusive basis. FIML estimates suggest that this change reduces gifts by 47 

percent, and almost eliminate them altogether using 2SLS estimates. 

Not surprisingly, these estimates suggest that much of the lifetime transfers by the 

wealthy are tax motivated. These estimated effects are in harmony with the observed historical 

pattern of gifts. In 1976, for instance, the maximum gift tax rate was increased from 0.5775 

to 0.7 effective on January 1, 1977. In anticipation of the increase in gift tax rates at the 

beginning of 1977, gifts increased substantially in 1976. Gift tax receipts were $1.8 billion in 

1976 (1977 fiscal year) compared to $0.4 billion in 1975, and dropped to $159 million in 

1977. See Joulfaian (1998, Table 17 and Figure 3). 

While these findings suggest that taxes are an important consideration in the timing of 

transfers, they are subject to a number of caveats. Because gifts in this data represent transfers 
23 

over a lifetime, or at least over the 1977-1989 period, the resulting aggregation bias may 

preempt us from accurately gauging the effects of taxes. This is especially the case as income 

and transfer tax regimes have changed over the years. On the other hand, and notwithstanding 

the aggregation bias, cumulative lifetime transfers are essential in computing tax rates. 

6. CONCLUSION 

This paper traces the tax treatment of different modes of wealth transfers, with a 

special emphasis on the behavior of the rich. After accounting for a number of features of the 

tax Code, including those of the income, estate, and gift taxes, the paper explores the 

conditions for the superiority of each of gifts and bequests. Capital gains taxes, in addition to 

gift taxes, can seriously raise the cost of gifts. In particular, it is less optimal for married 

couples to make gifts than their widowed counterparts, who may avoid estate taxes and benefit 

from the step up in basis at death. 

The empirical results demonstrate that taxes have significant effects on the timing of 

transfers. This finding suggests that the wealthy seem to pursue a tax minimization strategy in 

the timing of transfers, which adds another dimension to the literature on intergenerational 

transfers. While addressing how taxes influence the disposition of wealth, however, this paper 

does not examine how wealth accumulation itself might be affected by taxes (Stiglitz, 1983; 

Holtz-Eakin, 1996). Given the large concentration of wealth in the hands of top wealthholders, future research should explore these effects. 
24 

REFERENCES 

Adams, James D. “Equalization of True Gift and Estate Tax Rates,” Journal of Public 

Economics 9, 1978, 59-71. 

Advisory Commission on Intergovernmental Relations. Significant Features of Fiscal 

Federalism, 1988 Edition, Volume I, Washington, DC, 1987. 

Altonji, Joseph G., Hayashi, Fumio, and Laurence J. Kotlikoff. “Parental Altruism and Inter 

Vivos Transfers: Theory and Evidence,” Journal of Political Economy 105(6), 1997, 1121-66. 

Auten, Gerald, and David Joulfaian. "Charitable Contributions and Intergenerational 

Transfers," Journal of Public Economics 59, 1996, 55-68. 

Auten, Gerald, and Janette Wilson, “Sales of Capital Assets Reported on Individual Income 

Tax Returns, 1985,” SOI Bulletin, Spring 1999, 113-136. 

Balcer, Yves and Kenneth L. Judd, “Effects of Capital Gains Taxation on Life-Cycle 

Investment and Portfolio Management,” Journal of Finance 42(3), July 1987, 743-58. 

Becker, Gary S. “A Theory of Social Interactions,” Journal of Political Economy 82, 1974, 

1063-1093. 

Bernheim, Douglas B. "Does the Estate Tax Raise Revenue?" in Lawrence H. Summers (ed.), 

Tax Policy and the Economy, Volume 1, Cambridge, Massachusetts: The MIT Press, 1987. 

Bernheim, Douglas B., Shleifer, Andrei, and Lawrence Summers H. “The Strategic Bequest 

Motive,” Journal of Political Economy 93(6), 1985, 1045-1076. 

Bogart, William and William Gentry. "Capital Gains Taxes and Realizations: Evidence from 

Interstate Comparisons," Review of Economics and Statistics 77, No. 2, May 1995, 267-282. 

Boskin, Michael J. “Estate Taxation and Charitable Bequests,” Journal of Public Economics 

5, 1976, 27-56. 

Clotfelter, Charles T. 1985, Federal Tax Policy and Charitable Giving (University of 

Chicago Press, Chicago). 

Eller, Martha Britton. “Federal Taxation of Wealth Transfers, 1992-1995,” SOI Bulletin, 

Internal Revenue Service, Statistics of Income, Winter 1996-97, Washington, DC 1997. 

Fiekowsky, Seymour. Economics of Death Taxes in the United States, Unpublished 

Dissertation, Harvard University, 1959. 
25 

Feldstein, Martin. "Charitable Bequests, Estate Taxation, and Intergenerational Wealth 

Transfers,” in Research Papers, sponsored by the Commission on Private Philanthropy and 

Public Needs, vol. III, Special Behavioral Studies of Foundations and Corporations, U.S. 

Department of the Treasury, 1977, 1485-1500. 

Holtz-Eakin, Douglas. “The Uneasy Empirical Case for Abolishing the Estate Tax,” paper 

presented at the 1996 New York University Tax Law Review Colloquium, 1996. 

Johnson, Barry W. “Personal Wealth, 1992-1995,” Statistics of Income Bulletin, Winter 1997-

1998, Washington, DC, 1998, 70-95. 

Joulfaian, David. "The Federal Estate and Gift Tax: Description, Profile of Taxpayers, and 

Economic Consequences,” OTA Paper no. 80, U.S. Department of the Treasury, December, 

1998, http://www.treas.gov/ota/ota80.pdf. 

Joulfaian, David. "The Distribution and Division of Bequests: Evidence from the Collation 

Study," OTA Paper no. 71, U.S. Department of the Treasury, 1994, 

http://www.treas.gov/ota/ota71.pdf. 

Joulfaian, David. “Estate Taxes and Charitable Bequest by the Wealthy,” National Tax 

Journal, forthcoming, 2000. 

Joulfaian, David. “Charitable Bequests and Estate Taxes," National Tax Journal 44, June 

1991, 169-180. 

Kuehlwein, Michael. “The Non-Equalization of True Gift and Estate Tax Rates,” Journal of 

Public Economics 53, 1994, 319-323. 

McGarry, Kathleen. “Inter vivos Transfers and Intended Bequests,” Journal of Public 

Economics 73, 1999a, 321-352. 

McGarry, Kathleen. “The Cost of Equality: Unequal Bequests and Tax Avoidance,” Journal 

of Public Economics, 1999b, forthcoming. 

Poterba, James. Inter Vivos Transfers and the Incentive Effects of Estate and Gift Taxes in 

the United States, MIT, 1998, mimeo. 

Stiglitz, Joseph E. "Notes on Estate Taxes, Redistribution, and the Concept of Balanced 

Growth Path Incidence," Journal of Political Economy 8, 1978, 5137-150. 

Wilhelm, Mark O. “Bequest Behavior and the Effect of Heirs' Earnings: Testing the 

Altruistic Model of Bequests,” American-Economic-Review; 86(4), September 1996, 874-92. 
Table 1 

Estate/Gift Tax and State Death Tax Credit Rate Schedules 

Estate/Gift Tax Rate Schedule State Death Tax Credit Rate Schedule 

If the amount of Taxable 

Estate/Gift ($1,000s) 

then for the tentative tax If the Adjusted Taxable 

Estate* ($1,000s) 

then for the maximum tax credit 

is over but not over enter the amount over is over but not over enter the amount over 

0 10 $0 + 18.0% $0 0 40 $0 + 0.0% $0 

10 20 1,800 + 20.0% 10 40 90 0 + 0.8% 40 

20 40 3,800 + 22.0% 20 90 140 400 + 1.6% 90 

40 60 8,200 + 24.0% 40 140 240 1,200 + 2.4% 140 

60 80 13,000 + 26.0% 60 240 440 3,600 + 3.2% 240 

80 100 18,200 + 28.0% 80 440 640 10,000 + 4.0% 440 

100 150 23,800 + 30.0% 100 640 840 18,000 + 4.8% 640 

150 250 38,800 + 32.0% 150 840 1,040 27,600 + 5.6% 840 

250 500 70,800 + 34.0% 250 1,040 1,540 38,800 + 6.4% 1,040 

500 750 155,800 + 37.0% 500 1,540 2,040 70,800 + 7.2% 1,540 

750 1,000 248,300 + 39.0% 750 2,040 2,540 106,800 + 8.0% 2,040 

1,000 1,250 345,800 + 41.0% 1,000 2,540 3,040 146,800 + 8.8% 2,540 

1,250 1,500 448,300 + 43.0% 1,250 3,040 3,540 190,800 + 9.6% 3,040 

1,500 2,000 555,800 + 45.0% 1,500 3,540 4,040 238,800 + 10.4% 3,540 

2,000 2,500 780,800 + 49.0% 2,000 4,040 5,040 290,800 + 11.2% 4,040 

2,500 3,000 1,025,800 + 53.0% 2,500 5,040 6,040 402,800 + 12.0% 5,040 

3,000 1,290,800 + 55.0% 3,000 6,040 7,040 522,800 + 12.8% 6,040 

7,040 8,040 650,800 + 13.6% 7,040 

8,040 9,040 786,800 + 14.4% 8,040 

9,040 10,040 930,800 + 15.2% 9,040 

10,040 1,082,800 + 16.0% 10,040 *

 The adjusted taxable estate is equal to the taxable estate less $60,000. 
Table 2 

Federal Marginal Tax Rates After Unified Credit and the State Death Tax Credit, 1999 

Taxable Estate ($000's) Estate/Gift Tax 

Rate (%) 

(1) 

State Death Tax 

Credit Rate (%) 

(2) 

Net Estate 

Tax Rate (%) 

(3) over but not over 

Under 650 0.00 Varies 0.00 

650 700 37.0 4.0 33.0 

700 750 37.0 4.8 32.2 

750 900 39.0 4.8 34.2 

900 1,000 39.0 5.6 33.4 

1,000 1,100 41.0 5.6 35.4 

1,100 1,250 41.0 6.4 34.6 

1,250 1,500 43.0 6.4 36.6 

1,500 1,600 45.0 6.4 38.6 

1,600 2,000 45.0 7.2 37.8 

2,000 2,100 49.0 7.2 41.8 

2,100 2,500 49.0 8.0 41.0 

2,500 2,600 53.0 8.0 45.0 

2,600 3,000 53.0 8.8 44.2 

3,000 3,100 55.0 8.8 46.2 

3,100 3,600 55.0 9.6 45.4 

3,600 4,100 55.0 10.4 44.6 

4,100 5,100 55.0 11.2 43.8 

5,100 6,100 55.0 12.0 43.0 

6,100 7,100 55.0 12.8 42.2 

7,100 8,100 55.0 13.6 41.4 

8,100 9,100 55.0 14.4 40.6 

9,100 10,000 55.0 15.2 39.8 

10,000 10,100 60.0 15.2 44.8 

10,100 17,184* 60.0 16.0 44.0 

17,184* and over 55.0 16.0 39.0 

* 21,040 between 1988 and 1997. 
Table 3A 

Ratio of After-tax Bequests to After-tax Gifts 

Years (n) 

$ 0 1 2 3 5 10 15 20 25 30 35 40 

0.00 1.000 0.994 0.989 0.985 0.758 0.806 0.842 0.868 0.887 0.900 0.910 0.916 

0.25 1.067 1.057 1.049 1.041 0.792 0.837 0.871 0.895 0.913 0.925 0.933 0.939 

0.50 1.143 1.129 1.116 1.104 0.831 0.873 0.904 0.926 0.942 0.953 0.960 0.966 

0.75 1.231 1.211 1.193 1.177 0.875 0.913 0.941 0.961 0.975 0.985 0.991 0.996 

1.00 1.333 1.306 1.282 1.260 0.925 0.959 0.983 1.001 1.013 1.021 1.027 1.031 

B=0.08, Jc=0.25, and Je =Jg=0.55. 

Table 3B 

Ratio of After-tax Bequests to After-tax Gifts 

(Zero Capital Gains Taxes) 

Years (n) 

$ 0 1 2 3 5 10 15 20 25 30 35 40 

0.00 1.000 0.969 0.942 0.918 0.697 0.697 0.697 0.697 0.697 0.697 0.697 0.697 

0.25 1.000 0.969 0.942 0.918 0.697 0.697 0.697 0.697 0.697 0.697 0.697 0.697 

0.50 1.000 0.969 0.942 0.918 0.697 0.697 0.697 0.697 0.697 0.697 0.697 0.697 

0.75 1.000 0.969 0.942 0.918 0.697 0.697 0.697 0.697 0.697 0.697 0.697 0.697 

1.00 1.000 0.969 0.942 0.918 0.697 0.697 0.697 0.697 0.697 0.697 0.697 0.697 

B=0.08, Jc=0, and Je =Jg=0.55. 
Table 4 

Ratio of After-tax Bequests to After-tax Gifts: Account for State Gift Taxes 

Years (n) 

$ 0 1 2 3 5 10 15 20 25 30 35 40 

0.00 1.220 1.195 1.173 1.154 0.779 0.828 0.864 0.892 0.911 0.925 0.934 0.941 

0.25 1.293 1.264 1.237 1.214 0.811 0.859 0.895 0.921 0.939 0.952 0.962 0.968 

0.50 1.377 1.341 1.310 1.282 0.848 0.894 0.929 0.954 0.972 0.984 0.993 0.999 

0.75 1.473 1.430 1.392 1.359 0.889 0.934 0.967 0.991 1.008 1.020 1.029 1.034 

1.00 1.584 1.532 1.487 1.448 0.937 0.980 1.012 1.035 1.051 1.063 1.070 1.076 

B=0.08, Jc=0.25, Je=0.581, Jg=0.71 

Table 4A 

Maximum State Gift Tax Rate (Percent) 

State General On Children Comments 

Connecticut 6 6 Introduced in 1991 

Delaware 6 6 

Louisiana 3 3 

New York 21 21 Expires in 2000 

North Carolina 17 12 

South Carolina 8 8 Expired in 1992 

Tennessee 16 9.5 

Wisconsin 20 12.5 Phased-out between 1988 and 1992 
Table 5 

Ratio of After-tax of Bequests to and Gifts by Surviving Spouse to After-tax Gifts by Married Couple 

Years (n) 

$ 0 1 2 3 5 10 15 20 25 30 35 40 

0.00 1.434 1.426 1.418 1.412 1.087 1.155 1.207 1.244 1.271 1.291 1.304 1.313 

0.25 1.529 1.516 1.503 1.492 1.136 1.200 1.248 1.283 1.308 1.326 1.338 1.347 

0.50 1.639 1.618 1.600 1.583 1.191 1.251 1.295 1.327 1.350 1.366 1.377 1.384 

0.75 1.765 1.736 1.710 1.687 1.254 1.309 1.349 1.377 1.397 1.412 1.421 1.428 

1.00 1.912 1.872 1.838 1.807 1.326 1.374 1.410 1.435 1.452 1.464 1.473 1.479 

B=0.08, Jc=0.25, Je=0, Je= 0.55 for gift tax when n#3, and Jg=0.55. 
Table 6A 

Ratio of Combined After-tax Bequests to After-tax Gifts of Closely Held Businesses 

(Valuation Discounts Apply) 

Years (n) 

$ 0 1 2 3 5 10 15 20 25 30 35 40 

0.00 0.949 0.952 0.955 0.958 0.813 0.864 0.902 0.931 0.951 0.965 0.975 0.982 

0.25 1.016 1.016 1.016 1.016 0.852 0.898 0.933 0.958 0.975 0.988 0.997 1.003 

0.50 1.093 1.089 1.085 1.081 0.896 0.937 0.966 0.988 1.003 1.014 1.021 1.026 

0.75 1.183 1.173 1.164 1.155 0.946 0.98 1.004 1.022 1.034 1.043 1.048 1.052 

1.00 1.288 1.271 1.255 1.241 1.002 1.028 1.047 1.06 1.07 1.076 1.08 1.083 

B=0.08, Jc=0.25, Jg=0.385, Je=0.385, Je= 0.55 for gift tax when n#3; Jc=0.25 on fraction of wealth escaping estate taxation. 
Table 6B 

Ratio of After-tax Bequests to After-tax Gifts of Closely Held Businesses 

(Estate Tax Deferred) 

Year of Death (m) 

$ 0 1 2 3 5 10 15 20 25 30 35 40 

0.00 1.081 1.075 1.069 1.064 0.890 0.919 0.942 0.958 0.970 0.979 0.984 0.988 

0.25 1.122 1.114 1.107 1.100 0.913 0.942 0.963 0.979 0.990 0.998 1.004 1.007 

0.50 1.169 1.159 1.149 1.141 0.938 0.967 0.988 1.003 1.013 1.021 1.026 1.029 

0.75 1.224 1.210 1.198 1.187 0.968 0.995 1.015 1.029 1.039 1.046 1.051 1.054 

1.00 1.288 1.271 1.255 1.241 1.002 1.028 1.047 1.060 1.070 1.076 1.080 1.083 

B=0.08, Jc=0.25, Jg=0.55, Je=0.383, Je= 0.55 for gift tax when m#3, and m=n-20. 
Table 7 

Sample Statistics for Selected Variables 

(Standard Deviations in Parentheses) 

Item 

Observations 

All Without Gifts With Gifts 

Wealth ($Millions) 10.7286 7.7293 15.3489 

(23.5524) (14.2543) (32.5851) 

Gifts ($Millions) 0.2934 0 0.7455 

(1.5229) 0 (2.3577) 

Gift/Wealth 0.0204 0 0.0517 

(0.0567) 0 (0.0808) 

Age 75.6369 74.5084 77.3754 

(11.0482) (11.7565) (9.6081) 

Widowed 0.4480 

(0.4974) 

0.4097 

(0.4919) 

0.5070 

(0.5002) 

Cash Share 0.2755 0.2679 0.2872 

(0.2363) (0.2376) (0.2339) 

Gift Tax Rate (Jg) 0.5389 0.5197 0.5685 

(0.1245) (0.1450) (0.0743) 

Estate Tax Rate (Je) 0.5232 0.5005 0.5581 

(0.1187) (0.1399) (0.0601) 

Capital Gains Tax Rate (Jc) 0.3140 0.3157 0.3113 

(0.0246) (0.0245) (0.0246) 

Relative Price of Gifts, Equation (11) 0.9009 0.9327 0.8517 

(0.1551) (0.1705) (0.1110) 

Business/Wealth 0.1355 0.1322 0.1407 

(0.2377) (0.2358) (0.2406) 

Observations 2,355 1,428 927 
Table 8 

Sample Attributes by Size of Wealth and Giving Status 

Size of wealth 

($1000s) 

Observations Sample Mean 

All 

with Gifts Wealth 

($1000s) 

Gifts 

($1000s) 

Gifts/ 

Wealth 

Gift Tax 

Rate 

Estate 

Tax Rate 

Gains 

Tax Rate 

Price of 

Gifts 

Fraction 

Widowed Age 

Business 

Number Percent Share

Individuals Reporting Gifts 

0 1,000 28 28 100 799 87 10.4 37.9 34.9 30.8 108.0 67.9 79 7.7 

1,000 2,500 17 17 100 1,586 161 8.9 45.5 44.7 30.9 95.4 47.1 81 14.3 

2,500 5,000 53 53 100 4,428 125 2.9 56.9 55.3 31.0 88.4 45.3 73 13.1 

5,000 10,000 458 458 100 6,951 358 5.1 57.4 55.4 31.2 86.5 53.7 77 12.9 

10,000 20,000 228 228 100 13,895 646 4.5 58.6 60.5 31.3 77.5 48.7 78 14.0 

20,000 50,000 105 105 100 30,041 1,919 6.2 57.4 55.4 31.0 86.9 41.9 77 17.5 

50,000 ****** 38 38 100 116,810 4,379 4.5 57.3 55.4 30.7 85.5 47.4 78 24.6 

All 927 927 100 15,349 745 5.0 56.8 55.8 31.1 85.2 50.7 77 14.1 

Individuals Not Reporting Gifts 

0 1,000 266 0 0 691 0 0.0 29.9 27.3 31.5 114.2 60.5 76 4.6 

1,000 2,500 106 0 0 1,425 0 0.0 44.6 44.4 31.5 99.0 50.0 76 5.5 

2,500 5,000 170 0 0 4,259 0 0.0 58.0 55.8 32.0 91.0 37.1 70 14.2 

5,000 10,000 640 0 0 6,766 0 0.0 57.9 55.5 31.5 88.5 35.5 75 16.0 

10,000 20,000 169 0 0 13,278 0 0.0 59.1 60.1 31.2 79.2 31.4 75 16.4 

20,000 50,000 59 0 0 28,181 0 0.0 61.0 56.9 32.3 88.9 42.4 77 20.1 

50,000 ****** 18 0 0 96,756 0 0.0 59.7 56.1 31.4 89.5 16.7 77 24.7 

All 1,428 0 0 7,729 0 0.0 52.0 50.1 31.6 93.3 41.0 75 13.2 

All Individuals 

0 1,000 294 28 9.5 701 8 1.0 30.6 28.0 31.4 113.6 61.2 76 4.9 

1,000 2,500 123 17 13.8 1,448 22 1.2 44.7 44.4 31.4 98.5 49.6 77 6.7 

2,500 5,000 223 53 23.8 4,299 30 0.7 57.7 55.7 31.7 90.4 39.0 71 14.0 

5,000 10,000 1,098 458 41.7 6,843 149 2.1 57.7 55.4 31.4 87.6 43.1 76 14.7 

10,000 20,000 397 228 57.4 13,632 371 2.6 58.8 60.3 31.3 78.2 41.3 76 15.0 

20,000 50,000 164 105 64.0 29,372 1,229 4.0 58.6 55.9 31.5 87.6 41.8 76 18.8 

50,000 ****** 56 38 67.9 110,364 2,971 3.1 58.1 55.6 30.9 86.8 37.5 78 24.7 

All 2,355 927 39.4 10,729 293 2.0 53.9 52.3 31.4 90.1 44.8 76 13.6 
Table 9 

Probability of Making Gifts by Price of Gifts 

Relative Price of Gifts* Percent with Gifts Standard Deviation Sample Size 

Under 0.75 0.54 0.03 228 

0.75 0.80 0.53 0.03 306 

0.80 0.85 0.48 0.02 437 

0.85 0.90 0.43 0.02 421 

0.90 0.95 0.37 0.03 319 

0.95 1.00 0.32 0.03 231 

1.00 1.05 0.21 0.03 162 

1.05 1.10 0.15 0.04 94 

1.10 and over 0.06 0.02 157 

All 0.39 0.01 2,355 

* Price as defined in equation (11). 
-- --

-- --

Table 10 

The Effects of Taxes on Lifetime Gifts 

(Dependent Variable: Lifetime Gifts/Wealth) 

Variable 

Generalized Tobit 

Probit IV 2SLS FIML Tobit

Coefficient Standard Error Coefficient Standard Error Coefficient Standard Error 

Constant -6.7631* 0.6198 -0.4589 0.3903 -0.4510* 0.0559 

ln Wealth 0.4111* 0.0429 0.0231 0.0203 0.0257* 0.0038 

Married -0.3016* 0.0624 -0.0557* 0.0163 -0.0378* 0.0054 

Number of Children 0.0282 0.0221 0.0025 0.0034 0.0022 0.0021 

Age<55 -0.7879* 0.2464 -0.0746 0.0582 -0.0617* 0.0258 

55#Age<65 -0.1419 0.1226 -0.0224 0.0184 -0.0148 0.0135 

65#Age<75 0.0193 0.0900 0.0001 0.0120 -0.0001 0.0090 

75#Age<85 0.1199 0.0708 0.0206 0.0107 0.0145* 0.0060 

Business Share 0.0459 0.1230 0.0196 0.0164 0.0133 0.0116 

Relative Price of Gifts -0.9749* 0.4043 -0.2030* 0.0707 -0.1328* 0.0374 

8 -- 0.1404 0.0741 --

F -- -- 0.1000 0.0013 

F(z) 0.3718 0.3205 

Log Likelihood -1382 1011 6546 

Observations 2355 927 2355 

* Significant at the 5 percent level. 
Figure 1. The Effect of Taxes on the Relative Price of Gifts

(20-year Holding Period, 8 Percent Appreciation Rate, and Accrued Gains Share of 50 Percent)

The Effect of Estate Taxes 

-0.20 

0.00 

0.20 

0.40 

0.60 

0.80 

1.00 

1.20 

1.40 

1.60 

1.80 

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 

Estate Tax Rate 

Relative Price of Gifts 

The Effect of Capital Gains Taxes 

0.00 

1.00 

2.00 

3.00 

4.00 

5.00 

6.00 

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 

Capital Gains Tax Rate 

Relative Price of Gifts 

The Effect of Gift Taxes 

0.00 

0.20 

0.40 

0.60 

0.80 

1.00 

1.20 

1.40 

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 

Gift Tax Rate 

Relative Price of Gifts 
Appendix A

The Effects of Taxes on the Relative Price of Gifts

1. Effect of the estate tax on the relative price: 

Define A as: 

n n A = t c - bt c + b t c t g + (1+ p ) - t c (1+ p ) > 0 

then differentiating the relative price of gifts with respect to the estate tax rate yields, 

n ¶ (PG / PB ) (1- b t c + t g ) (1+ p ) = - ¶t e (1- b t c ) A 

which is unambiguously negative as long as the capital gains tax rate Jc is less than 1. 

2. Effect of the gift tax on the relative price: 

Differentiating the relative price of gifts with respect to the gift tax rate yields, 

n n ¶ (PG / PB ) -bt c (1- t e )(1- b t c + t g ) (1 + p ) + (1- t e ) (1+ p ) A 

= ¶t g (1- b t c ) A2 

which is always positive for reasonable values of tax rates (Jc<1, Je<1, and Jg<1 ). 

3. Effect of the capital gains tax on the relative price: 

Differentiating the relative price of gifts with respect to the capital gains tax rate yields, 

n n ¶ (PG / PB ) (1- t e )(1- b t c + t g ) (1+ p ) (b - bt c + (1+ p ) - 1) 

= ¶t c (1- b t c ) A2 

n n -b (1- t e ) (1+ p ) (1- b t c ) + b (1- t e )(1- b t c + t g ) (1+ p ) 

+ 

(1- b t c )

2 A 

The first term is positive. The second term is also positive as (1-$Jc)<(1-$Jc+Jg), given 

Jg>0 and Jc<1. Higher capital gains taxes raise the price of gifts. 
Appendix B: State Estate and InheritanceTax Rates, 1987 

Connecticut Delaware Idaho Indiana Iowa Kansas Kentucky Louisiana Maryland Massachusetts 

Taxable Estate Inheritance Inheritance Inheritance Inheritance Inheritance Inheritance Inheritance Inheritance Inheritance Estate 

10,100,000 and Over 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

10,000,000 10,100,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

9,100,000 10,000,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

9,000,000 9,100,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

8,100,000 9,000,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

8,000,000 8,100,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

7,100,000 8,000,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

7,000,000 7,100,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

6,100,000 7,000,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

6,000,000 6,100,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

5,100,000 6,000,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

5,000,000 5,100,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

4,100,000 5,000,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

4,000,000 4,100,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1600 

3,600,000 4,000,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1500 

3,500,000 3,600,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1500 

3,200,000 3,500,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1500 

3,100,000 3,200,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1500 

3,000,000 3,100,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1500 

2,700,000 3,000,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1500 

2,600,000 2,700,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1500 

2,500,000 2,600,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1500 

2,200,000 2,500,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1500 

2,100,000 2,200,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1500 

2,000,000 2,100,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1500 

1,700,000 2,000,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1400 

1,600,000 1,700,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1400 

1,500,000 1,600,000 0.1144 0.0600 0.1500 0.1000 0.0800 0.0500 0.1000 0.0300 0.0200 0.1400 

1,400,000 1,500,000 0.1144 0.0600 0.1500 0.0800 0.0800 0.0500 0.1000 0.0300 0.0200 0.1400 

1,100,000 1,400,000 0.1144 0.0600 0.1500 0.0800 0.0800 0.0500 0.1000 0.0300 0.0200 0.1400 

1,000,000 1,100,000 0.1144 0.0600 0.1500 0.0800 0.0800 0.0500 0.1000 0.0300 0.0200 0.1400 

900,000 1,000,000 0.1001 0.0600 0.1500 0.0700 0.0800 0.0500 0.1000 0.0300 0.0200 0.1300 

800,000 900,000 0.1001 0.0600 0.1500 0.0700 0.0800 0.0500 0.1000 0.0300 0.0200 0.1300 

750,000 800,000 0.1001 0.0600 0.1500 0.0700 0.0800 0.0500 0.1000 0.0300 0.0200 0.1200 

700,000 750,000 0.1001 0.0600 0.1500 0.0700 0.0800 0.0500 0.1000 0.0300 0.0200 0.1200 

600,000 700,000 0.1001 0.0600 0.1500 0.0600 0.0800 0.0500 0.1000 0.0300 0.0200 0.1200 

500,000 600,000 0.0858 0.0600 0.1500 0.0600 0.0800 0.0500 0.1000 0.0300 0.0200 0.1100 

440,000 500,000 0.0858 0.0600 0.1000 0.0500 0.0800 0.0400 0.0800 0.0300 0.0200 0.1100 

400,000 440,000 0.0858 0.0600 0.1000 0.0500 0.0800 0.0400 0.0800 0.0300 0.0200 0.1100 

300,000 400,000 0.0715 0.0600 0.1000 0.0500 0.0800 0.0400 0.0800 0.0300 0.0200 0.1000 
Appendix B: State Estate and InheritanceTax Rates, 1987 

Michigan Mississippi Montana Nebraska New Hampshire New Jersey New York North Carolina Ohio Oklahoma 

Taxable Estate Inheritance Estate Inheritance Inheritance Inheritance Inheritance Estate Inheritance Estate Estate 

10,100,000 and Over 0.1000 0.1600 0.0800 0.0100 0.0000 0.1600 0.2100 0.1200 0.0700 0.1000 

10,000,000 10,100,000 0.1000 0.1600 0.0800 0.0100 0.0000 0.1600 0.2000 0.1200 0.0700 0.1000 

9,100,000 10,000,000 0.1000 0.1520 0.0800 0.0100 0.0000 0.1600 0.2000 0.1200 0.0700 0.0900 

9,000,000 9,100,000 0.1000 0.1520 0.0800 0.0100 0.0000 0.1600 0.1900 0.1200 0.0700 0.0900 

8,100,000 9,000,000 0.1000 0.1444 0.0800 0.0100 0.0000 0.1600 0.1900 0.1200 0.0700 0.0900 

8,000,000 8,100,000 0.1000 0.1444 0.0800 0.0100 0.0000 0.1600 0.1800 0.1200 0.0700 0.0900 

7,100,000 8,000,000 0.1000 0.1360 0.0800 0.0100 0.0000 0.1600 0.1800 0.1200 0.0700 0.0900 

7,000,000 7,100,000 0.1000 0.1360 0.0800 0.0100 0.0000 0.1600 0.1700 0.1200 0.0700 0.0900 

6,100,000 7,000,000 0.1000 0.1280 0.0800 0.0100 0.0000 0.1600 0.1700 0.1200 0.0700 0.0900 

6,000,000 6,100,000 0.1000 0.1280 0.0800 0.0100 0.0000 0.1600 0.1600 0.1200 0.0700 0.0900 

5,100,000 6,000,000 0.1000 0.1200 0.0800 0.0100 0.0000 0.1600 0.1600 0.1200 0.0700 0.0900 

5,000,000 5,100,000 0.1000 0.1200 0.0800 0.0100 0.0000 0.1600 0.1500 0.1200 0.0700 0.0900 

4,100,000 5,000,000 0.1000 0.1120 0.0800 0.0100 0.0000 0.1600 0.1500 0.1200 0.0700 0.0850 

4,000,000 4,100,000 0.1000 0.1120 0.0800 0.0100 0.0000 0.1600 0.1400 0.1200 0.0700 0.0850 

3,600,000 4,000,000 0.1000 0.1040 0.0800 0.0100 0.0000 0.1600 0.1400 0.1200 0.0700 0.0850 

3,500,000 3,600,000 0.1000 0.1040 0.0800 0.0100 0.0000 0.1600 0.1300 0.1200 0.0700 0.0850 

3,200,000 3,500,000 0.1000 0.0960 0.0800 0.0100 0.0000 0.1600 0.1300 0.1200 0.0700 0.0850 

3,100,000 3,200,000 0.1000 0.0960 0.0800 0.0100 0.0000 0.1500 0.1300 0.1200 0.0700 0.0850 

3,000,000 3,100,000 0.1000 0.0960 0.0800 0.0100 0.0000 0.1500 0.1200 0.1200 0.0700 0.0850 

2,700,000 3,000,000 0.1000 0.0880 0.0800 0.0100 0.0000 0.1500 0.1200 0.1100 0.0700 0.0800 

2,600,000 2,700,000 0.1000 0.0880 0.0800 0.0100 0.0000 0.1400 0.1200 0.1100 0.0700 0.0800 

2,500,000 2,600,000 0.1000 0.0880 0.0800 0.0100 0.0000 0.1400 0.1100 0.1100 0.0700 0.0800 

2,200,000 2,500,000 0.1000 0.0800 0.0800 0.0100 0.0000 0.1400 0.1100 0.1000 0.0700 0.0800 

2,100,000 2,200,000 0.1000 0.0800 0.0800 0.0100 0.0000 0.1300 0.1100 0.1000 0.0700 0.0800 

2,000,000 2,100,000 0.1000 0.0800 0.0800 0.0100 0.0000 0.1300 0.1000 0.1000 0.0700 0.0800 

1,700,000 2,000,000 0.1000 0.0720 0.0800 0.0100 0.0000 0.1300 0.1000 0.0900 0.0700 0.0800 

1,600,000 1,700,000 0.1000 0.0720 0.0800 0.0100 0.0000 0.1200 0.1000 0.0900 0.0700 0.0800 

1,500,000 1,600,000 0.1000 0.0720 0.0800 0.0100 0.0000 0.1200 0.0900 0.0900 0.0700 0.0800 

1,400,000 1,500,000 0.1000 0.0640 0.0800 0.0100 0.0000 0.1200 0.0900 0.0800 0.0700 0.0800 

1,100,000 1,400,000 0.1000 0.0640 0.0800 0.0100 0.0000 0.1100 0.0900 0.0800 0.0700 0.0800 

1,000,000 1,100,000 0.1000 0.0640 0.0800 0.0100 0.0000 0.1000 0.0800 0.0800 0.0700 0.0800 

900,000 1,000,000 0.1000 0.0560 0.0800 0.0100 0.0000 0.1000 0.0800 0.0700 0.0700 0.0750 

800,000 900,000 0.1000 0.0560 0.0800 0.0100 0.0000 0.0900 0.0700 0.0700 0.0700 0.0750 

750,000 800,000 0.1000 0.0480 0.0800 0.0100 0.0000 0.0900 0.0700 0.0700 0.0700 0.0750 

700,000 750,000 0.0800 0.0480 0.0800 0.0100 0.0000 0.0900 0.0700 0.0700 0.0700 0.0700 

600,000 700,000 0.0800 0.0480 0.0800 0.0100 0.0000 0.0800 0.0600 0.0700 0.0700 0.0700 

500,000 600,000 0.0800 0.0400 0.0800 0.0100 0.0000 0.0800 0.0600 0.0700 0.0700 0.0700 

440,000 500,000 0.0700 0.0400 0.0800 0.0100 0.0000 0.0700 0.0500 0.0600 0.0600 0.0650 

400,000 440,000 0.0700 0.0400 0.0800 0.0100 0.0000 0.0700 0.0500 0.0600 0.0600 0.0650 

300,000 400,000 0.0700 0.0320 0.0800 0.0100 0.0000 0.0700 0.0500 0.0600 0.0600 0.0650 
Appendix B: State Estate and InheritanceTax Rates, 1987 

Pennsylvania Rhode Island South Carolina South Dakota Tennessee Wisconsin 

Taxable Estate Inheritance Estate Estate Inheritance Inheritance Inheritance 

10,100,000 and Over 0.0600 0.1914 0.0800 0.0750 0.0950 0.1250 

10,000,000 10,100,000 0.0600 0.1914 0.0800 0.0750 0.0950 0.1250 

9,100,000 10,000,000 0.0600 0.1770 0.0800 0.0750 0.0950 0.1250 

9,000,000 9,100,000 0.0600 0.1770 0.0800 0.0750 0.0950 0.1250 

8,100,000 9,000,000 0.0600 0.1706 0.0800 0.0750 0.0950 0.1250 

8,000,000 8,100,000 0.0600 0.1706 0.0800 0.0750 0.0950 0.1250 

7,100,000 8,000,000 0.0600 0.1642 0.0800 0.0750 0.0950 0.1250 

7,000,000 7,100,000 0.0600 0.1642 0.0800 0.0750 0.0950 0.1250 

6,100,000 7,000,000 0.0600 0.1578 0.0800 0.0750 0.0950 0.1250 

6,000,000 6,100,000 0.0600 0.1578 0.0800 0.0750 0.0950 0.1250 

5,100,000 6,000,000 0.0600 0.1514 0.0800 0.0750 0.0950 0.1250 

5,000,000 5,100,000 0.0600 0.1514 0.0800 0.0750 0.0950 0.1250 

4,100,000 5,000,000 0.0600 0.1450 0.0800 0.0750 0.0950 0.1250 

4,000,000 4,100,000 0.0600 0.1450 0.0800 0.0750 0.0950 0.1250 

3,600,000 4,000,000 0.0600 0.1379 0.0800 0.0750 0.0950 0.1250 

3,500,000 3,600,000 0.0600 0.1379 0.0800 0.0750 0.0950 0.1250 

3,200,000 3,500,000 0.0600 0.1315 0.0800 0.0750 0.0950 0.1250 

3,100,000 3,200,000 0.0600 0.1315 0.0800 0.0750 0.0950 0.1250 

3,000,000 3,100,000 0.0600 0.1315 0.0800 0.0750 0.0950 0.1250 

2,700,000 3,000,000 0.0600 0.1251 0.0800 0.0750 0.0950 0.1250 

2,600,000 2,700,000 0.0600 0.1251 0.0800 0.0750 0.0950 0.1250 

2,500,000 2,600,000 0.0600 0.1251 0.0800 0.0750 0.0950 0.1250 

2,200,000 2,500,000 0.0600 0.1187 0.0800 0.0750 0.0950 0.1250 

2,100,000 2,200,000 0.0600 0.1187 0.0800 0.0750 0.0950 0.1250 

2,000,000 2,100,000 0.0600 0.1187 0.0800 0.0750 0.0950 0.1250 

1,700,000 2,000,000 0.0600 0.1123 0.0800 0.0750 0.0950 0.1250 

1,600,000 1,700,000 0.0600 0.1123 0.0800 0.0750 0.0950 0.1250 

1,500,000 1,600,000 0.0600 0.1123 0.0800 0.0750 0.0950 0.1250 

1,400,000 1,500,000 0.0600 0.1059 0.0800 0.0750 0.0950 0.1250 

1,100,000 1,400,000 0.0600 0.1059 0.0800 0.0750 0.0950 0.1250 

1,000,000 1,100,000 0.0600 0.1059 0.0800 0.0750 0.0950 0.1250 

900,000 1,000,000 0.0600 0.1008 0.0800 0.0750 0.0950 0.1250 

800,000 900,000 0.0600 0.0944 0.0800 0.0750 0.0950 0.1250 

750,000 800,000 0.0600 0.0944 0.0800 0.0750 0.0950 0.1250 

700,000 750,000 0.0600 0.0864 0.0800 0.0750 0.0950 0.1250 

600,000 700,000 0.0600 0.0800 0.0800 0.0750 0.0950 0.1250 

500,000 600,000 0.0600 0.0800 0.0800 0.0750 0.0950 0.1250 

440,000 500,000 0.0600 0.0656 0.0800 0.0750 0.0950 0.1000 

400,000 440,000 0.0600 0.0656 0.0800 0.0750 0.0750 0.1000 

300,000 400,000 0.0600 0.0656 0.0800 0.0750 0.0750 0.1000 
Appendix C: State GiftTax Rates, 1987 

Taxable Gifts Delaware Louisiana New York North Carolina South Carolina Tennessee Wisconsin 

10,100,000 and over 

9,100,000 10,100,000 

8,100,000 9,100,000 

7,100,000 8,100,000 

6,100,000 7,100,000 

5,100,000 6,100,000 

4,100,000 5,100,000 

3,600,000 4,100,000 

3,100,000 3,600,000 

3,000,000 3,100,000 

2,600,000 3,000,000 

2,500,000 2,600,000 

2,100,000 2,500,000 

2,000,000 2,100,000 

1,600,000 2,000,000 

1,500,000 1,600,000 

1,100,000 1,500,000 

1,000,000 1,100,000 

900,000 1,000,000 

700,000 900,000 

600,000 700,000 

500,000 600,000 

440,000 500,000 

300,000 440,000 

240,000 300,000 

200,000 240,000 

150,000 200,000 

100,000 150,000 

50,000 100,000 

40,000 50,000 

25,000 40,000 

15,000 25,000 

10,000 15,000 

0 10,000 

0.060 0.030 0.210 0.120 0.080 0.095 0.125 

0.060 0.030 0.200 0.120 0.080 0.095 0.125 

0.060 0.030 0.190 0.120 0.080 0.095 0.125 

0.060 0.030 0.180 0.120 0.080 0.095 0.125 

0.060 0.030 0.170 0.120 0.080 0.095 0.125 

0.060 0.030 0.160 0.120 0.080 0.095 0.125 

0.060 0.030 0.150 0.120 0.080 0.095 0.125 

0.060 0.030 0.140 0.120 0.080 0.095 0.125 

0.060 0.030 0.130 0.120 0.080 0.095 0.125 

0.060 0.030 0.120 0.120 0.080 0.095 0.125 

0.060 0.030 0.120 0.110 0.080 0.095 0.125 

0.060 0.030 0.110 0.110 0.080 0.095 0.125 

0.060 0.030 0.110 0.100 0.080 0.095 0.125 

0.060 0.030 0.100 0.100 0.080 0.095 0.125 

0.060 0.030 0.100 0.090 0.080 0.095 0.125 

0.060 0.030 0.090 0.090 0.080 0.095 0.125 

0.060 0.030 0.090 0.080 0.080 0.095 0.125 

0.060 0.030 0.080 0.080 0.080 0.095 0.125 

0.060 0.030 0.080 0.070 0.080 0.095 0.125 

0.060 0.030 0.070 0.070 0.080 0.095 0.125 

0.060 0.030 0.060 0.070 0.080 0.095 0.125 

0.060 0.030 0.060 0.070 0.080 0.095 0.125 

0.060 0.030 0.050 0.060 0.080 0.095 0.100 

0.060 0.030 0.050 0.060 0.080 0.075 0.100 

0.060 0.030 0.040 0.060 0.080 0.075 0.100 

0.060 0.030 0.040 0.060 0.080 0.065 0.100 

0.060 0.030 0.040 0.050 0.080 0.065 0.100 

0.060 0.030 0.030 0.050 0.080 0.065 0.100 

0.060 0.030 0.030 0.040 0.070 0.065 0.050 

0.060 0.030 0.030 0.030 0.070 0.065 0.050 

0.060 0.030 0.030 0.030 0.060 0.055 0.050 

0.060 0.030 0.020 0.020 0.060 0.055 0.025 

0.060 0.020 0.020 0.020 0.060 0.055 0.025 

0.060 0.020 0.020 0.010 0.060 0.055 0.025 
Appendix D 

Capital Gains Tax Rates by State, 1987 

Alabama 5.00 Missouri 6.00 

Alaska 0.00 Montana 11.00 

Arizona 3.20 Nebraska 5.90 

Arkansas 7.00 Nevada 0.00 

California 9.30 New Hampshire 0.00 

Colorado 5.00 New Jersey 3.50 

Connecticut 2.80 New Mexico 8.50 

Delaware 8.80 New York 7.50 

District of Columbia 10.00 North Carolina 7.00 

Florida 0.00 North Dakota 14.00 

Georgia 6.00 Ohio 6.90 

Hawaii 10.00 Oklahoma 6.00 

Idaho 3.28 Oregon 9.00 

Illinois 2.50 Pennsylvania 2.10 

Indiana 4.20 Rhode Island 7.58 

Iowa 4.31 South Carolina 7.00 

Kansas 9.00 South Dakota 0.00 

Kentucky 2.40 Tennessee 0.00 

Louisiana 6.00 Texas 0.00 

Maine 10.00 Utah 7.75 

Maryland 4.50 Vermont 8.75 

Massachusetts 5.00 Virginia 5.75 

Michigan 4.60 Washington 0.00 

Minnesota 9.00 West Virginia 6.50 

Mississippi 5.00 Wisconsin 2.77 

Wyoming 0.00