Abstract
This article identifies problems with the annual exclusion and suggests modifications that, if enacted, would both eliminate abusive uses of the exclusion and expand sound policy based uses of other exclusions. Part II of the article briefly sets forth the basic structure of each branch of the federal transfer tax system—the estate tax, the gift tax and the generation-skipping transfer tax. It then examines the historical relationship between the gift tax and the other federal transfer taxes and demonstrates that the annual exclusion from gift tax is actually an exception to each branch of the federal transfer tax system. Part III explores the history and purposes of the annual exclusion and the technical requirements for its use and discusses current uses made of it, some of which uses are inconsistent with its underlying policy justification. Part IV explores and analyzes problems in the transfer tax system caused by the annual exclusion as it is currently designed and used. Part V discusses possible modifications of the exclusion.
This article concludes that, because of enforcement and administration concerns and in order to limit government intrusion into daily life, it is desirable to retain the annual exclusion in some form, but it should be substantially modified. The most desirable modifications are to: (i) reduce the annual exclusion to that amount of incidental gifts made on average by persons with approximately $600,000 of wealth; (ii) place a cap on the annual exclusion of $20,000 per year, per donor; (iii) allow the annual exclusion only for outright gifts or for gifts to trusts that may make distributions only to one beneficiary and that require inclusion of any amount not so distributed in that beneficiary's gross estate; and (iv) expand existing exclusions for tuition gifts and medical care gifts, which exclusions should include expenditures made for housing, food, books and other expenses common to education and to care of the elderly and other persons unable to provide for themselves. Attached as an appendix to this article is draft statutory language designed to accomplish the proposed changes in the law. Specifically, the statutory language modifies the annual exclusion and creates a gift tax exclusion for transfers for student expenses and for expenses of the elderly and incompetent.
Recommended Citation
Smith, Robert B.
(1994)
"Should We Give Away the Annual Exclusion?,"
Florida Tax Review: Vol. 1:
No.
1, Article 10.
Available at:
https://scholarship.law.ufl.edu/ftr/vol1/iss1/10