d. The present system, by allowing deductions for transfers to charity, provides a major incentive for taxpayers to make gifts to charitable organizations during lifetime and at death. Congress should consider the impact of repeal on these organizations; such consideration, however, should also take into account the Federal income tax treatment of charitable gifts and of charities themselves. Finally, consideration should be given to the fact that the estate tax is criticized as forcing the sale of family farms and closely-held businesses. Provisions exist in the estate tax law for deferred payment of estate taxes, for virtually income tax-free redemption of stock to enable payment of such taxes, and for special farm-use valuation of certain assets. It may well be that these relief provisions are too tightly drawn; as subsequently noted, they certainly are unduly complex. The burdensome impact of the estate tax on farms and closely-held businesses calls for thorough reconsideration of these provisions. The generation-skipping tax was enacted in 1976 to provide equal transfer tax treatment between families that used generation-skipping trusts for the transmission of wealth and those that did not. Congress determined that while the tax advantages of generation-skipping trusts were theoretically available to all, in actual practice they were used more often by the wealthy. Accordingly, the Congress sought to establish a system to tax wealth once each generation.* If transfer taxes are to be retained, it is arguable that the goal sought to be achieved by this tax is as valid today as it was in 1976. Proponents say that we cannot allow individuals to leap-frog the imposition of the estate tax by complex trusts or other dispositions. On the other hand, many lawyers who work extensively in the estate and gift tax field believe that the tax is largely ineffective. It is horrendously complex and results in stilted and often inefficient forms of property transfer at substantial estate planning costs. Against this background of argument, we suggest that the following more specific considerations, among others, are relevant: 1. While the tax was aimed at a device employed by the very wealthy, it may be precisely that segment of society which is able to avoid the tax, at least in part, by avoiding the use of generation-skipping trusts and adopting a device known as "layering". It may be that the less affluent, those do not have sufficient wealth to "layer", are those most affected by the tax. 2. The tax has a potential impact on more estates than for example, when the order of deaths originally anticipated - is other than the most actuarially probable. General Explanation of the Tax Reform Act of 1976 prepared by the Staff of the Joint Committee on Taxation 564 (December 29, 1976). 3. Some experts believe that the provisions are so extremely complex and subtle in their terms and operation that taxpayers and their advisors will never be able adequately to comply. Estate planning of necessity must often be done by general practice lawyers who will not be able to master these provisions, and they do not lend themselves to standard dispository plans. 4. Adequate administration of these provisions by the Internal Revenue Service will require increased capacity for storage and retrieval of information accumulated over many years, as well as examining agents who can be trained to enforce this complicated tax. Opponents argue that it is doubtful whether the Service will ever be able to achieve these objectives. 5. Although the tax was enacted in 1976, proposed regulations on substantive matters were not issued until early this year. These proposed regulations have been severely criticized and may require substantial revision. The Section of Taxation submitted over 100 pages of detailed individual comments. Furthermore, although the first returns are due June 30, 1981, the Service has yet to issue return forms four and one-half years after the enactment of the tax. - As might be expected, the generation-skipping tax will produce little revenue: its purpose is to make the estate tax work by removing any advantage of dispositions which would otherwise avoid the effect of the estate tax. * The extreme complexity * The tax is estimated to produce $280 million per year. General Explanation of the Tax Reform Act of 1976, Staff of the Joint Committee on Taxation 21 (December 29, 1976). of the tax and the ability of some to avoid it by "layering" may well call for reconsideration of its effects and operation. The question whether outright repeal is justified calls for careful balancing of the resulting effects on the integrity of the estate tax and the extreme complexities and burdens which a generation-skipping tax may necessarily require. III. OTHER ESTATE AND GIFT TAX ISSUES A. THE UNIFIED CREDIT AND RATE SCHEDULES The appropriate level of exemption from transfer tax accomplished through the unified credit, and the appropriate level of rates and degree of progressivity, are closely related to the issue of repeal of these taxes. If the Congress determines that the fundamental purposes of the estate and gift tax laws are valid today, then Congress must determine the level of wealth to be taxed and the burden to be imposed on such wealth. Also relevant in these decisions is the extent to which Congress determines that lifetime giving should be encouraged, a consideration which may not have been given adequate attention in the changes in the Tax Reform Act of 1976.* If the exemption level is set at $600,000, it is estimated that the number of estates incurring tax would be reduced * Miller, The Federal Gift Tax: Rate Revision, 51 A.B.A.J. 333 (April, 1965). 82-735 0-81--12 from two and eight-tenths percent of all decedents to three-tenths of one percent.* Obviously, inflation is increasing the value of property so that transfer tax burdens are increasing although there are no corresponding increases in real wealth or purchasing power. The estate and gift tax rates are progressive; this factor, plus the implementation of the equivalent exemption through a fixed-dollar credit, causes the increase in tax burden despite the absence of any increase in real value. The present level of the exemption equivalent of $175,625 was set in the Tax Reform Act of 1976. Many experts feel that Congress should at the least reconsider the appropriate level of exemption, and the possibility of indexing this exemption for future changes in value of the dollar. B. ANNUAL GIFT TAX EXCLUSION The annual gift tax exclusion of $3,000 per donee was * * set by the Revenue Act of 1942. The original purpose of the exclusion was "to obviate the necessity of keeping an account of and reporting numerous small gifts, * to fix the amount sufficiently large to cover in most cases wedding and Christmas gifts and occasional gifts of relatively small amounts"** that is, to * Pamphlet Setting Out Background and Description of Estate and Gift Tax Bills prepared by the Staff of the Joint Committee on Taxation (May 1, 1981). ** S. Rep. No. C.B. 496, 525. 665, 72d Cong., 1st Sess. (1932), 1939-1 Pt. 2 |