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such incentive results from the fact that the estate tax base is
broader than the gift tax base: assets that are used to pay gift
taxes (and that are thereby effectively removed from the donor’s
gross estate) are not included in the gift tax base (i.e., gift
taxes are “tax-exclusive”). Assets used to pay estate taxes, on
the other hand, are included in the estate tax base (i.e., estate
taxes are “tax-inclusive”). “Thus, even if the applicable
transfer tax rates were the same, the net amount transferred to a
beneficiary from a given pre-tax amount of property was greater
for a lifetime transfer solely because of the difference in the
tax bases.” Id.
To reduce this disparity, the 1976 Act required, in new
section 2035(c), that the decedent’s gross estate be grossed up
by the amount of gift tax paid by the decedent or his estate on
gifts made by the decedent or his spouse within 3 years of death
(hereinafter, this is sometimes referred to as the gross-up
rule). The purpose of this amendment was described as follows:
Since the gift tax paid on a lifetime transfer
which is included in a decedent’s gross estate is taken
into account both as a credit against the estate tax
and also as a reduction in the estate tax base,
substantial tax savings can be derived under present
law by making so-called “deathbed gifts” even though
the transfer is subject to both taxes. To eliminate
this tax avoidance technique, the committee believes
that the gift tax paid on transfers made within 3 years
of death should in all cases be included in the
decedent’s gross estate. This “gross-up” rule will
eliminate any incentive to make deathbed transfers to
remove an amount equal to the gift taxes from the
transfer tax base.
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