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TITLE III--ESTATE TAX RELIEF

Subtitle A--Reductions of Estate and Gift Tax Rates

SEC. 301. REDUCTIONS OF ESTATE AND GIFT TAX RATES.

(a) MAXIMUM RATE OF TAX REDUCED TO 50 PERCENT-

(1) IN GENERAL- The table contained in section 2001(c)(1) is amended by striking the two highest brackets and inserting the following:

`Over $2,500,000

$1,025,800, plus 50% of the excess over $2,500,000.'.

(2) PHASE-IN OF REDUCED RATE- Subsection (c) of section 2001 is amended by adding at the end the following new paragraph:

`(3) PHASE-IN OF REDUCED RATE- In the case of decedents dying, and gifts made, during 2001, the last item in the table contained in paragraph (1) shall be applied by substituting `53%' for `50%'.'.

(b) REPEAL OF PHASEOUT OF GRADUATED RATES- Subsection (c) of section 2001 is amended by striking paragraph (2) and redesignating paragraph (3), as added by subsection (a), as paragraph (2).

(c) ADDITIONAL REDUCTIONS OF RATES OF TAX - Subsection (c) of section 2001, as so amended, is amended by adding at the end the following new paragraph:

`(3) PHASEDOWN OF TAX - In the case of estates of decedents dying, and gifts made, during any calendar year after 2002--

`(A) IN GENERAL- Except as provided in subparagraph (C), the tentative tax under this subsection shall be determined by using a table prescribed by the Secretary (in lieu of using the table contained in paragraph (1)) which is the same as such table; except that--

`(i) each of the rates of tax shall be reduced by the number of percentage points determined under subparagraph (B), and

`(ii) the amounts setting forth the tax shall be adjusted to the extent necessary to reflect the adjustments under clause (i).

`(B) PERCENTAGE POINTS OF REDUCTION-

--The number of

`For calendar year:

--percentage points is:

2003

--1.0

2004

--2.0.

`(C) TABLE FOR YEARS AFTER 2004- The table applicable under this subsection to estates of decedents dying, and gifts made, during calendar year 2004 shall apply to estates of decedents dying, and gifts made, after calendar year 2004.

`(D) COORDINATION WITH CREDIT FOR STATE DEATH TAXES- Rules similar to the rules of subparagraph (A) shall apply to the table contained in section 2011(b) except that the Secretary shall prescribe percentage point reductions which maintain the proportionate relationship (as in effect before any reduction under this paragraph) between the credit under section 2011 and the tax rates under subsection (c).'.

(d) EFFECTIVE DATES-

(1) SUBSECTIONS (a) AND (b)- The amendments made by subsections (a) and (b) shall apply to estates of decedents dying, and gifts made, after December 31, 2000.

(2) SUBSECTION (c)- The amendment made by subsection (c) shall apply to estates of decedents dying, and gifts made, after December 31, 2002.

SEC. 302. SENSE OF THE CONGRESS CONCERNING REPEAL OF THE DEATH TAX .

(a) FINDINGS- Congress finds the following:

(1) The death tax stifles economic growth by taking productive resources out of the private sector, thereby causing unemployment and inhibiting job creation.

(2) The death tax penalizes hard work and entrepreneurial activity by causing the demise of small, family-owned businesses when an owner dies.

(3) The death tax rates in the United States are the second highest among all industrialized nations.

(4) The death tax prevents minorities from gaining an economic foothold in the economy since it limits the inter-generational transfer of wealth, which is critical to establishing a legacy and power base for minorities in our society.

(5) The death tax presents serious challenges for farmers whose value is in their land, not liquid assets, and who must sell land to pay the tax , thereby jeopardizing the future existence of the already-struggling family farm.

(6) The death tax contributes to the development of rural areas by causing farms and ranches to be sold and subdivided.

(7) Previous attempts by Congress to create death tax exemptions have been ineffective due to an inability to legislatively duplicate the complex family relationships that exist in our society.

(8) Increasing entrepreneurship and investment in retirement will bring a whole new class of people under the death tax .

(b) SENSE OF CONGRESS- It is the sense of Congress that the death tax relief in this Act is considered a first step in our effort to ultimately repeal this onerous tax .

Subtitle B--Unified Credit Replaced With Unified Exemption Amount

SEC. 311. UNIFIED CREDIT AGAINST ESTATE AND GIFT TAXES REPLACED WITH UNIFIED EXEMPTION AMOUNT.

(a) IN GENERAL-

(1) ESTATE TAX - Subsection (b) of section 2001 (relating to computation of tax ) is amended to read as follows:

`(b) COMPUTATION OF TAX -

`(1) IN GENERAL- The tax imposed by this section shall be the amount equal to the excess (if any) of--

`(A) the tentative tax determined under paragraph (2), over

`(B) the aggregate amount of tax which would have been payable under chapter 12 with respect to gifts made by the decedent after December 31, 1976, if the provisions of subsection (c) (as in effect at the decedent's death ) had been applicable at the time of such gifts.

`(2) TENTATIVE TAX - For purposes of paragraph (1), the tentative tax determined under this paragraph is a tax computed under subsection (c) on the excess of--

`(A) the sum of--

`(i) the amount of the taxable estate, and

`(ii) the amount of the adjusted taxable gifts, over

`(B) the exemption amount for the calendar year in which the decedent died.

`(3) EXEMPTION AMOUNT- For purposes of paragraph (2), the term `exemption amount' means the amount determined in accordance with the following table:

`In the case of

--The exemption

calendar year:

--amount is:

2001

--$675,000

2002 and 2003

--$700,000

2004

--$850,000

2005

--$950,000

2006 or thereafter

--$1,000,000.

`(4) ADJUSTED TAXABLE GIFTS- For purposes of paragraph (2), the term `adjusted taxable gifts' means the total amount of the taxable gifts (within the meaning of section 2503) made by the decedent after December 31, 1976, other than gifts which are includible in the gross estate of the decedent.'

(2) GIFT TAX - Subsection (a) of section 2502 (relating to computation of tax ) is amended to read as follows:

`(a) COMPUTATION OF TAX -

`(1) IN GENERAL- The tax imposed by section 2501 for each calendar year shall be the amount equal to the excess (if any) of--

`(A) the tentative tax determined under paragraph (2), over

`(B) the tax paid under this section for all prior calendar periods.

`(2) TENTATIVE TAX - For purposes of paragraph (1), the tentative tax determined under this paragraph for a calendar year is a tax computed under section 2001(c) on the excess of--

`(A) the aggregate sum of the taxable gifts for such calendar year and for each of the preceding calendar periods, over

`(B) the exemption amount under section 2001(b)(3) for such calendar year.'

(b) REPEAL OF UNIFIED CREDITS-

(1) Section 2010 (relating to unified credit against estate tax ) is hereby repealed.

(2) Section 2505 (relating to unified credit against gift tax ) is hereby repealed.

(c) CONFORMING AMENDMENTS-

(1)(A) Subsection (b) of section 2011 is amended--

(i) by striking `adjusted' in the table, and

(ii) by striking the last sentence.

(B) Subsection (f) of section 2011 is amended by striking `, reduced by the amount of the unified credit provided by section 2010'.

(2) Subsection (a) of section 2012 is amended by striking `and the unified credit provided by section 2010'.

(3) Subparagraph (A) of section 2013(c)(1) is amended by striking `2010,'.

(4) Paragraph (2) of section 2014(b) is amended by striking `2010,'.

(5) Clause (ii) of section 2056A(b)(12)(C) is amended to read as follows:

`(ii) to treat any reduction in the tax imposed by paragraph (1)(A) by reason of the credit allowable under section 2010 (as in effect on the day before the date of the enactment of the Small Business Tax Fairness Act of 2000) or the exemption amount allowable under section 2001(b) with respect to the decedent as a credit under section 2505 (as so in effect) or exemption under section 2521 (as the case may be) allowable to such surviving spouse for purposes of determining the amount of the exemption allowable under section 2521 with respect to taxable gifts made by the surviving spouse during the year in which the spouse becomes a citizen or any subsequent year,'.

(6) Subsection (a) of section 2057 is amended by striking paragraphs (2) and (3) and inserting the following new paragraph:

`(2) MAXIMUM DEDUCTION- The deduction allowed by this section shall not exceed the excess of $1,300,000 over the exemption amount (as defined in section 2001(b)(3)).'

(7)(A) Subsection (b) of section 2101 is amended amended to read as follows:

`(b) COMPUTATION OF TAX -

`(1) IN GENERAL- The tax imposed by this section shall be the amount equal to the excess (if any) of--

`(A) the tentative tax determined under paragraph (2), over

`(B) a tentative tax computed under section 2001(c) on the amount of the adjusted taxable gifts.

`(2) TENTATIVE TAX - For purposes of paragraph (1), the tentative tax determined under this paragraph is a tax computed under section 2001(c) on the excess of--

`(A) the sum of--

`(i) the amount of the taxable estate, and

`(ii) the amount of the adjusted taxable gifts, over

`(B) the exemption amount for the calendar year in which the decedent died.

`(3) EXEMPTION AMOUNT-

`(A) IN GENERAL- The term `exemption amount' means $60,000.

`(B) RESIDENTS OF POSSESSIONS OF THE UNITED STATES- In the case of a decedent who is considered to be a nonresident not a citizen of the United States under section 2209, the exemption amount under this paragraph shall be the greater of--

`(i) $60,000, or

`(ii) that proportion of $175,000 which the value of that part of the decedent's gross estate which at the time of his death is situated in the United States bears to the value of his entire gross estate wherever situated.

`(C) SPECIAL RULES-

`(i) COORDINATION WITH TREATIES- To the extent required under any treaty obligation of the United States, the exemption amount allowed under this paragraph shall be equal to the amount which bears the same ratio to the exemption amount under section 2001(b)(3) (for the calendar year in which the decedent died) as the value of the part of the decedent's gross estate which at the time of his death is situated in the United States bears to the value of his entire gross estate wherever situated. For purposes of the preceding sentence, property shall not be treated as situated in the United States if such property is exempt from the tax imposed by this subchapter under any treaty obligation of the United States.

`(ii) COORDINATION WITH GIFT TAX EXEMPTION AND UNIFIED CREDIT- If an exemption has been allowed under section 2521 (or a credit has been allowed under section 2505 as in effect on the day before the date of the enactment of the Small Business Tax Fairness Act of 2000) with respect to any gift made by the decedent, each dollar amount contained in subparagraph (A) or (B) or the exemption amount applicable under clause (i) of this subparagraph (whichever applies) shall be reduced by the exemption so allowed under 2521 (or, in the case of such a credit, by the amount of the gift for which the credit was so allowed).'.

(8) Section 2102 is amended by striking subsection (c).

(9)(A) Subsection (a) of section 2107 is amended by adding at the end the following new paragraph:

`(3) LIMITATION ON EXEMPTION AMOUNT- Subparagraphs (B) and (C) of section 2101(b)(3) shall not apply in applying section 2101 for purposes of this section.'.

(B) Subsection (c) of section 2107 is amended--

(i) by striking paragraph (1) and by redesignating paragraphs (2) and (3) as paragraphs (1) and (2), respectively, and

(ii) by striking the second sentence of paragraph (2) (as so redesignated).

(10) Paragraph (1) of section 6018(a) is amended by striking `the applicable exclusion amount in effect under section 2010(c)' and inserting `the exemption amount under section 2001(b)(3)'.

(11) Subparagraph (A) of section 6601(j)(2) is amended to read as follows:

`(A) the amount of the tentative tax which would be determined under the rate schedule set forth in section 2001(c) if the amount with respect to which such tentative tax is to be computed were $1,000,000, or'.

(12) The table of sections for part II of subchapter A of chapter 11 is amended by striking the item relating to section 2010.

(20) The table of sections for subchapter A of chapter 12 is amended by striking the item relating to section 2505.

(13) The table of sections for subchapter C of chapter 12 is amended by inserting before the item relating to section 2522 the following new item:

`Sec. 2521. Exemption.'.

(d) EFFECTIVE DATE- The amendments made by this section--

(1) insofar as they relate to the tax imposed by chapter 11 of the Internal Revenue Code of 1986, shall apply to estates of decedents dying after December 31, 2000, and

(2) insofar as they relate to the tax imposed by chapter 12 of such Code, shall apply to gifts made after December 31, 2000.

Subtitle C--Modifications of Generation-skipping Transfer Tax

SEC. 321. DEEMED ALLOCATION OF GST EXEMPTION TO LIFETIME TRANSFERS TO TRUSTS; RETROACTIVE ALLOCATIONS.

(a) IN GENERAL- Section 2632 (relating to special rules for allocation of GST exemption) is amended by redesignating subsection (c) as subsection (e) and by inserting after subsection (b) the following new subsections:

`(c) DEEMED ALLOCATION TO CERTAIN LIFETIME TRANSFERS TO GST TRUSTS-

`(1) IN GENERAL- If any individual makes an indirect skip during such individual's lifetime, any unused portion of such individual's GST exemption shall be allocated to the property transferred to the extent necessary to make the inclusion ratio for such property zero. If the amount of the indirect skip exceeds such unused portion, the entire unused portion shall be allocated to the property transferred.

`(2) UNUSED PORTION- For purposes of paragraph (1), the unused portion of an individual's GST exemption is that portion of such exemption which has not previously been--

`(A) allocated by such individual,

`(B) treated as allocated under subsection (b) with respect to a direct skip occurring during or before the calendar year in which the indirect skip is made, or

`(C) treated as allocated under paragraph (1) with respect to a prior indirect skip.

`(3) DEFINITIONS-

`(A) INDIRECT SKIP- For purposes of this subsection, the term `indirect skip' means any transfer of property (other than a direct skip) subject to the tax imposed by chapter 12 made to a GST trust.

`(B) GST TRUST- The term `GST trust' means a trust that could have a generation-skipping transfer with respect to the transferor unless--

`(i) the trust instrument provides that more than 25 percent of the trust corpus must be distributed to or may be withdrawn by 1 or more individuals who are non-skip persons--

`(I) before the date that the individual attains age 46,

`(II) on or before one or more dates specified in the trust instrument that will occur before the date that such individual attains age 46, or

`(III) upon the occurrence of an event that, in accordance with regulations prescribed by the Secretary, may reasonably be expected to occur before the date that such individual attains age 46;

`(ii) the trust instrument provides that more than 25 percent of the trust corpus must be distributed to or may be withdrawn by one or more individuals who are non-skip persons and who are living on the date of death of another person identified in the instrument (by name or by class) who is more than 10 years older than such individuals;

`(iii) the trust instrument provides that, if one or more individuals who are non-skip persons die on or before a date or event described in clause (i) or (ii), more than 25 percent of the trust corpus either must be distributed to the estate or estates of one or more of such individuals or is subject to a general power of appointment exercisable by one or more of such individuals;

`(iv) the trust is a trust any portion of which would be included in the gross estate of a non-skip person (other than the transferor) if such person died immediately after the transfer;

`(v) the trust is a charitable lead annuity trust (within the meaning of section 2642(e)(3)(A)) or a charitable remainder annuity trust or a charitable remainder unitrust (within the meaning of section 664(d)); or

`(vi) the trust is a trust with respect to which a deduction was allowed under section 2522 for the amount of an interest in the form of the right to receive annual payments of a fixed percentage of the net fair market value of the trust property (determined yearly) and which is required to pay principal to a non-skip person if such person is alive when the yearly payments for which the deduction was allowed terminate.

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