Inter Vivos Transfers or Bequests? Estate Taxes and the Timing of Parental Giving

The estates of individuals who die with wealth over specified levels are taxed at high marginal rates. In 1999 the marginal tax rates ranged from 37 percent on estates of $650,000 to 55 percent on estates of over $3 million. Because children are the most frequent heirs, one would expect other gift-giving behavior to children to be affected by the potential tax rates faced by the estate. However, surprisingly little is known about this relationship. This paper investigates the link between estate taxes and inter vivos transfers from parents to children. I find that the existence of estate taxes hastens the transfer of resources from parents to children. Those parents whose estates are likely to be subject to tax make greater inter vivos gifts to their children and these gifts increase with the marginal tax rate. I estimate that if estate taxes were eliminated, inter vivos transfers from parents to children would be reduced by nearly 30 percent per year. Despite these findings, there is also strong evidence that parents fail to take full advantage of opportunities for tax-free giving and transfer too little to children over their own lifetimes.