The Federal Gift Tax is designed to implement two competing policies: to tax gifts so as to prevent taxpayers from depleting their estates (and thus evading the estate tax) with tax-free lifetime transfers; but to tax gifts at a rate lower than testamentary transfers so as to encourage taxpayers to circulate wealth during life, thereby stimulating economic growth and income tax revenue. The gift tax has always been carefully crafted to balance these competing interests. That is, until now. The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") completely perverted these two policies.' EGTRRA was sold to the public as a repeal of the death tax. While not entirely true, EGTRRA did make several major changes to the federal estate and gift tax scheme. Most importantly, EGTRRA set into motion a phase-out of the estate tax between 2002 and 2010. This phase-out has three components. First, the unified credit - the amount taxpayers may give tax-free during life and at death - is scheduled to increase from $1 million in 2002 to $3.5 million in 2009. Second, the maximum estate tax and gift tax rates are scheduled to decrease from 50% in 2002 to 45% in 2009. Third, the estate tax will be abolished on January 1, 2010. What most taxpayers were not told, however, is that the gift tax is not dead. It is scheduled to continue beyond 2010. This poses two questions. First, if the sole purpose of the gift tax is to serve as a backstop to the estate tax, what purpose will the gift tax serve in 2010, when there is no estate tax? Second, why would any taxpayer make taxable lifetime gifts in 2010, when he or she can simply wait until death to make tax-free gifts? This Article will attempt to answer these questions, which EGTRRA left unanswered.
2 Appalachian J. L. 15 (2003)