Article on Federal Inheritance Tax

Wendy C. Gerzog (Professor, University of Baltimore School of Law)recently published an article entitled, What’sWrong with a Federal Inheritance Tax? (August 4, 2013).  Provided below is the abstract from SSRN:

Scholars have proposed a federal inheritance taxas an alternative to the current federal transfer tax system, but there areserious flaws with that idea. Those problems include: (1) different tax ratesand exemptions based on the decedent’s relationship to the beneficiary; (2) thelack of a tax on lifetime gratuitous transfers, including gifts with retainedinterests or control; (3) the persistence of most current valuation distortionabuses; and (4) significantly decreased compliance rates and increasedadministrative costs inherent in a system that taxes transferees ontransactions that may be largely unmonitored.

This article reviews common characteristics ofexisting inheritance tax systems in our U.S. states and internationally,particularly in Europe. In addition, the article analyzes the novelComprehensive Inheritance Tax (CIT) proposal of Professor Batchelder thatcombines some elements of existing inheritance tax systems with some featuresof the current transfer tax system and delivers the CIT through the federal incometax system.

Inequities abound in typical inheritance taxsystems where rates and exemptions are tied to the relationship between thetransferor and the transferee. Rewarding or punishing a relationship statusbetween the transferor and transferee is not a good measure of ability to payor an effective means of wealth redistribution. Moreover, the lack of a tax onlifetime transfers produces inequities since it is the very wealthiest ofdecedents who are most able to avoid an inheritance tax through early lifetimegifts. Finally, most compelling are the compliance issues and administrativecosts that would increase with the adoption of a federal inheritance tax.