The Timing Problem for the Unified Estate and Gift Tax

Abstract

Massive tax changes in 1976 eliminated the old two-tax system and installed a single, progressive transfer tax on the cumulative total of both lifetime gifts and property owned at death. A dynamic programming model is formulated in order to indicate the continued importance of timing in lifetime transfers for estate planning. Heuristic guidelines are provided because the new law does not nullify the appropriateness of lifetime gifts as a major estate planning function. Introduction The estate and gift tax reform in 1976 increased the complexity of estate planning, and this article provides a brief summary of the present law. A dynamic programming model is formulated in order to provide an understanding of the timing problems for the new unified estate and gift tax, to identify the important variables in the problem, and to develop some rules of thumb for practitioners. Overall, fewer estates will be taxed as a result of the massive gift and estate tax changes incorporated in the Tax Reform Act of 1976. Although little additional revenue is expected from these changes, the importance of the choice between making living gifts and testamentary transfers has been reduced as a result of the unified rate schedule. The marginal tax rates on gross gifts (not in contemplation of death), however, are still lower than the marginal tax rates on estates. Bagley and South I lI indicate that gift taxes affect the amount of wealth remaining. Their conclusion still holds under current law (that is, a $1 gift decreases a taxable estate by the amount of the gift tax paid). If the individual does not make the $1 gift, his or her taxable estate will be larger by the gift tax payable than if the gift had been made. Thus, the marginal tax rates for gifts require adjustment of the tax table rates. The type of property to give becomes more important in certain situations because of the elimination of the step-up basis for income tax purposes of Richard Rivers, D.B.A. and C.P.A. (Texas), is an assistant professor at Southern Illinois UniversityCarbondale. D. Larry Crumbley, C.P.A., is professor of accounting at Texas A&M University. A Ph.D., he has authored eight books, including Estate Planning After the 1976 Tax Reform, published by the American Management Association. He has published more than one hundred articles in professional journals and is currently editor of The Oil and Gas Tax Quarterly and a member of the editorial board of the Accounting Review.