Inter vivos wealth transfers, 1997 gifts

Statistics of Income Bulletin, Winter, 2003 by Martha Britton Eller

Like transfers of wealth at death, wealth transfers during life--called inter vivos wealth transfers--are subject to Federal taxation. Only gifts in excess of $10,000 were potentially taxable for Gift Year 1997. Because of this relatively high filing threshold, gift tax data extracted from Federal gift tax returns provide a glimpse into the economic behavior of predominantly wealthy Americans. Such behavior includes donors' transfers of money and other assets to gift recipients and the creation and continued funding of trusts, both of which are reported on gift tax returns. In order to learn more about those who file Federal gift tax returns, the Statistics of Income Division (SOI) of the Internal Revenue Service (IRS), an organization that extracts and publishes data from Federal tax and information returns, initiated the Gift Tax Panel Study. Information available from the study includes estimates of reported gift tax liabilities for Gift Year 1997, the composition of gifted assets in 1997, and the prevalence and size of valuation discounts claimed by donors, as well as data on the lifetime giving patterns of 1997 donors.

In the course of its gift tax study, SOI collected data from Federal gift tax returns filed by individuals who gave gifts during 1997 and reported those gifts to IRS in 1998. The population of 1997 donors included 218,008 individuals who transferred more than $31.1 billion in total gifts and reported $3.2 billion in net gift tax liability in 1998 [1]. Females comprised 53.3 percent of the gift tax filing population, and males comprised 46.7 percent of the population. Only 7.2 percent of the filing population actually reported a gift tax liability, and the average reported liability for those filers was $205,210. Donors gave a wide variety of gifts in 1997. The largest category of gifts was cash and cash management accounts, which made up more than a third of all gifts. The second and third largest categories of gifts were stock and real estate, respectively. While only a small percentage of donors, 10.1 percent, utilized discounts in the valuation of gifts, the size of total valuation discounts, $3.4 billion, was rather significant and represented 33.0 percent of the full value of discounted assets.

Prior to SOI's gift tax study, few data, besides broad totals from IRS revenue processing and collections, have been available for the gift tax filing population. SOI obtained and extracted data from post-1976 gift tax returns filed by donors included in the study, creating a retrospective panel of returns for selected donors. That is, both longitudinal data for years 1977 through 1997 and cross-sectional data for Gift Year 1997 have been collected. At this writing, only cross-sectional data have been analyzed. The panel study is the first in a series of annual gift tax studies that SOI will conduct in coming years. Future studies will provide cross-sectional gift tax data for a focus year of interest, as well as longitudinal gift tax data for a continuing sample of 1997 donors [2].

Background

The Federal gift tax is one of three taxes included in the current U.S. transfer tax system, which, simply stated, is a unified system that taxes transfers of property completed both during life and at death. The two other components of the U.S. transfer tax system are the estate tax, applied to the value of property transferred at death, and the generation-skipping transfer tax, applied to the value of property transferred to trust for the benefit of an individual or individuals two or more generations below that of the grantor, or donor.

The first Federal gift tax was introduced in the Revenue Act of 1924. The U.S. Congress imposed the 1924 tax after it realized that wealthy Americans could avoid the estate tax, introduced in 1916, by transferring wealth during their lifetimes. Tax-free inter vivos gifts effectively negated the estate tax's capacity to redistribute wealth accumulated by large estates and removed a source of revenue from the Federal government's reach.

The first gift tax was short-lived. Due to strong opposition against estate and gift taxes during the 1920's, Congress repealed the gift tax with the Revenue Act of 1926 [3]. Reintroduced in the Revenue Act of 1932, when the need to finance Federal spending during the Great Depression outweighed opposition to gift taxation, the 1932 gift tax allowed a grantor to transfer $50,000 tax-free during his or her life and allowed a $5,000 annual exclusion per gift recipient, or donee. The 1932 Act set gift tax rates at three-quarters of estate tax rates, a level maintained until 1976, when Congress passed the Tax Reform Act (TRA) of 1976 and created the unified estate and gift tax framework that consisted of a "single, graduated rate of tax imposed on both lifetime gift and testamentary dispositions" [4]. The generation-skipping transfer tax was also introduced in TRA of 1976.

During the years since 1932, features such as a deduction for gifts to spouse and rules on split gifts, those gifts made jointly by a married couple, were introduced to gift tax law, but the predominant changes to the law were adjustments to the amount of annual exclusion and lifetime exemption. A gift is taxed under the law that is in effect during the year in which the gift is completed, or given. According to transfer tax law in effect for gifts completed in 1997, the focus of this article, a grantor was required to file a Federal gift tax return for transfers of property in excess of $10,000 per donee, and the lifetime giving threshold was $600,000. Under Internal Revenue Code (IRC) section 2511(a), the gift tax applies to a broad spectrum of gifts, "whether the gift is in trust or otherwise, whether the gift is director indirect, and whether the property is real or personal, tangible or intangible." Regulation 25.2511-1(c)(1) provides that a completed gift, one that is subject to tax, is "any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed."