deferred under this provision will continue to bear interest at the regular rate (currently 7 percent).

The committee amendment also provides a special lien on property for payment of the deferred taxes attributable to a closely held business. Where this lien procedure is followed and a party is designated to make estate tax payments and receive and transmit notices to or from the Internal Revenue Service, the executor is to be discharged from personal liability and will not be required to post a bond equal to twice the amount of the tax deferred.

Effective date

These provisions are to apply to estates of decedents dying after December 31, 1976.

5. Generation-Skipping Transfers (sec. 2202 of the bill and secs. 2601, 2602, 2603, 2611, 2612, 2613, 2614, 2621, and 2622 of the Code)

Present law

Under present law, a Federal gift or estate tax is generally imposed upon the transfer of property by gift or by reason of death. However, the termination of an interest of a beneficiary (who is not the grantor) in a trust, life estate, or similar arrangement is not a taxable event unless the beneficiary under the trust has a general power of appointment with respect to the trust property.

This result (nontaxability) occurs even when the beneficiary under the trust has: (1) the right to receive the income from the trust; (2) the power to invade the principal of the trust, if this power is subject to an ascertainable standard relating to health, education, support, or maintenance; (3) a power (in each beneficiary) to draw down annually from his share of the principal the greater of 5 percent of its value or $5,000; (4) a power, exercisable during life or by will, to appoint any or all of his share of the principal to anyone other than himself, his creditors, his estate or the creditors of his estate; or (5) the right to manage the trust property by serving as trustee.

Currently, all States (except Wisconsin and Idaho) have a rule against perpetuities which limits the duration of a trust. While the rules of the different States are not completely uniform, in general, such laws require that the ownership of property held in trust must vest in the beneficiaries not later than the period of the lifetime of any "life in being" on the date of the transfer, plus 21 years (and 9 months) thereafter.

Reasons for change

The purpose of the Federal estate and gift taxes is not only to raise revenue, but also to do so in a manner which has as nearly as possible a uniform effect, generation by generation (taking into account. as the progressive rate structure does, the differences in the utility of assets according to the value held). These policies of revenue raising and equal treatment are best served where the transfer taxes (estate and gift) are imposed, on the average, at reasonably uniform intervals. Likewise, such policies are frustrated where the imposition of such taxes is deferred for very long intervals, as is possible, under present law, through the use of generation-skipping trusts.

Present law imposes transfer taxes every generation in the case of families where property passes directly from parent to child, and then from child to grandchild. However, where a generation-skipping trust is used, no tax is imposed upon the death of the child, even where the child has an income interest in the trust, and substantial powers with respect to the use, management, and disposition of the trust assets. While the tax advantages of generation-skipping trusts are theoretically available to all, in actual practice these devices are more valuable (in terms of tax savings) to wealthier families. Thus, generationskipping trusts are used more often by the wealthy.

Generation skipping results in inequities in the case of transfer taxes by enabling some families to pay these taxes only once every several generations, whereas most families must pay these taxes every generation. Generation skipping also reduces the progressive effect of the transfer taxes, since families with moderate levels of accumulated wealth may pay as much or more in cumulative transfer taxes as wealthier families who utilize generation-skipping devices.

The committee recognizes that there are many legitimate nontax purposes for establishing trusts. However, the committee also believes that the tax laws should be neutral and that there should be no tax advantage available in setting up trusts. Consequently, the committee amendment provides that property passing from one generation to successive generations in trust form should, for estate tax purposes, be treated substantially the same as property which is transferred outright from one generation to a successive generation.

Explanation of provision

The committee amendment imposes a tax in the case of generationskipping transfers under a trust or similar arrangement (such as a life estate) upon the distribution of the trust assets to a generationskipping heir (for example, a grandchild of the transferor) or upon the termination of an intervening interest in the trust (for example, the termination of an interest held by the transferor's child).

The tax would be substantially equivalent to the estate or gift tax which would have been imposed if the property had actually been transferred outright to each successive generation. For example, where a trust is created for the benefit of the grantor's child, with remainder to the grandchild, then, upon the death of the child, the tax would be computed by adding the child's portion of the trust assets to the child's estate, and computing the tax at the child's marginal estate tax rate.

Thus, under the committee amendment, the child would be treated as a "deemed transferor" of the trust property. The child's estate tax brackets are used as a measuring rod for purposes of determining the tax imposed on the generation-skipping transfer, but the child's estate is not liable for the payment of the tax. Instead, the tax would generally be paid out of the proceeds of the trust property. However, the trust would be entitled to any unused portion of the estate tax credit for the child's estate, and to the benefit of any increased marital deduction allowed to the estate as a result of the transfer. In addition, the charitable deduction would be allowable if part of the trust property were left to charity. The previously taxed property credit would also be

allowable where an estate tax had been imposed with respect to the creation of the trust and, within a 10-year period thereafter, the generation-skipping tax is imposed upon the death of the child.

The committee amendment provides that the tax would be imposed whenever the child, or other member of an intervening generation, had an income interest in the trust, or a power to invade corpus for his own benefit. The tax would not be imposed, however, where the child (as trustee for his children, for example) had nothing more than a right of management over the trust assets or a limited power of appointment among grandchildren or more remote descendants of the grantor.

Also, under the committee amendment, the tax would not be imposed in the case of an outright transfer from a parent to a grandchild (because the intervening generation receives no direct benefit from such a transfer). Likewise, a trust established for the benefit of the grantor's spouse, with the remainder outright to the grandchildren, would not be subject to the tax because the intervening generation has no interest in the trust. In addition (as a rule of administrative convenience), tax would not be imposed in the case of distributions of accounting income from a generation-skipping trust to a grandchild of the grantor.

The tax under these rules would be imposed only once each generation. Generally, a generation would be determined along family lines, where possible (i.e., the grantor, his wife, and his brothers and sisters would be one generation; their children would be a second generation; the grandchildren would be the third generation, etc.).

Where generation-skipping transfers are made outside the family, generations would be measured from the grantor. Individuals not more than 1212 years younger than the grantor would be treated as members of his generation; individuals more than 1212 years younger than the grantor, but not more than 371⁄2 years younger, would be considered members of his children's generation, etc. In cases where generation-skipping transfers are made outside the family, the deemed transferor (that is, this base for purposes of determining the tax) would be the estate of the person having the closest relationship to the grantor or the person having the intervening life interest or power (generally, the person named in the grantor's will or trust instrument). Effective date

In general, these provisions are to apply to generation-skipping transfers which occur after April 30, 1977. However, under a transitional rule provided by the committee amendment, the tax is not to be imposed for a 10-year period (until January 1, 1987) in the case of transfers: (a) under irrevocable inter vivos trusts in existence on April 30, 1977 (except to the extent that transfers are made from such trusts out of assets added to the trust after April 30, 1977, or (b) in the case of decedents dying before January 1, 1978, pursuant to a will (or revocable trust) which was in existence on May 1, 1977, and which was not amended or revoked at any time after that date. The purpose of this transition rule is to give beneficiaries under trusts which may have been created in reliance on existing law a 10-year grace period in which to relinquish their interests in the trust, if they wish to do

$3,000

$78

$35

$43

0

0

$5,000

0 -$300

-$300

0

415

-$300

358

-$300

57

$6,000

$200

$112

$88

-$300

-$300

-209

-293

$84

-300

-300

605

0

548

57

-300

354

-300

260

$8,000

94

38

-53

90

1,016

953

-74 c

-158

$84

-200

63

-200

696

586

0

110

561

$10,000.

459

102

1, 482

434

338

96

1,410

200

72

112

1,076

962

114

$88

$12,500

934

820

114

791

996

677

114

1,996

518

1,573

418

100

$15,000

1,446

127

1, 408

1,295

113

2,549

1,261

1, 152

109

2,549

976

2, 029

867

$17,500

1,996

109

33

1, 864

1, 831

33

3, 145

1,699

3, 145

1,666

33

2,516

2,516

1,371

1,342

29

0

$20,000

2,329

3,784

2,329

0

3, 784

2, 156

2,156

0

3,035

1,826

$25,000.

3,035

1,826

0

2,848

2, 848

0

5, 230

2,660

2, 660

0

5, 230

2,285

4, 170

$30,000

4, 170

2,285

0

3,960

3,960

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6, 850

3,750

3,750

0

6, 850

5, 468

5,468

3, 330

3,330

$35,000

5,228

5, 228

8, 625

8, 625

4,988

4,988

6, 938

6, 938

4, 508

4, 508

$40,000

6, 668

6, 668

6,398

10, 515

10, 515

6, 398

8, 543

5, 858

8, 543

5, 858

8, 251

8, 251

7,958

7,958

7,373

7,373

III. EXPLANATION OF ADDITIONAL COMMITTEE AMENDMENT TO H.R. 10612, AS REPORTED

A. TITLE XXII-ESTATE AND GIFT TAXES

1. Allowance of Credit Against Estate Tax (sec. 2201(a) of the bill and sec. 2010 of the Code)

Present law

Under present law, the estate of each decedent who was a resident or a citizen is entitled to an exemption of $60,000 for estate tax purposes. In the case of an estate of a nonresident alien, the exemption is $30,000.

Reasons for change

The present amount of the estate tax exemption was set in 1942. Since that date, the purchasing power of the dollar has decreased to less than one-third of its value in 1942. To some extent this effect has been mitigated by the addition of a provision for a marital deduction in 1948. Despite this the inflation which has occurred means that the estate tax now has a much broader impact than was originally contemplated.

In addition, since the present estate tax exemption is a deduction in determining the taxable estate, it results in a greater reduction at the estate's highest estate tax brackets. However, a credit in lieu of an exemption will have the effect of reducing the estate tax at the estate's lower estate tax brackets since a tax credit is applied as a dollar-fordollar reduction of the amount otherwise due. Thus, at a given level of revenue cost, a tax credit tends to confer more tax savings on smalland medium-sized estates, whereas a deduction tends to confer more tax savings on larger estates. The committee believes it would be more equitable if the exemption were replaced with a credit rather than a deduction.

Explanation of provision

The committee amendment provides for a credit in lieu of the present exemption for estate tax purposes. The amount of the credit will be $30,000 for decedents dying in 1977 and increases $5,000 each year until 1981 when the credit will be $50,000. When fully effective, the $50,000 credit is approximately equivalent to a tax exemption on the first $197,000 of the decedent's taxable estate. Thus, in 1981 an estate of $197,000 or less will be exempt from estate tax. The committee amendment also makes comparable changes in the treatment of estates of nonresident aliens.

Effective date

This amendment is effective for estates of decedents dying after December 31, 1976.

72-966- -2

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