INTRODUCTION

A consideration of federal estate and gift taxation is more meaningful if carried on against a background of what has been and is the approach to this type of taxation.1 Broadly speaking, we have in this area a hybrid tax system. A gift tax is imposed on lifetime transfers on the basis of a gift tax rate schedule, and an estate tax is imposed on deathtime transfers on the basis of a separate estate tax rate schedule, but some transfers are subjected to both a gift tax and an estate tax, with a credit for the gift tax paid against the estate tax assessed. The gift tax rate schedule is graduated so that the tax on stated amounts increases as the overall total of transfers subject to gift tax gets larger. Similarly, the estate tax is a graduated tax which depends on the size of the estate. The rates in the gift tax rate schedule are three fourths of the rates in the estate tax schedule at similar brackets. (The present gift and estate tax rate schedules are set forth in Appendix A at page 266.)

Under our present system, the tax imposed on deathtime. transfers starts at the bottom of the estate tax rate schedule. This is true without reference to how far up the gift tax rate schedule a person may have moved due to lifetime transfers, since the two taxes for rate and most other purposes are independent of each other. As indicated above, there have developed some revenue protective rules that create an area where lifetime transfers subject to gift taxation are also treated as deathtime transfers subject to estate taxation. When a transfer falls into this area, double taxation is avoided to some extent by the allowance of a credit against the estate tax assessed for all or part of the gift tax paid. Though our present system has this hybrid aspect in certain limited areas, we will refer to it hereafter as a dual tax system.

The effective rate under any rate schedule is not the one quoted in the schedule but depends upon the transfers which can be made free of the imposition of any tax, that is, the transfers that might be said to be in the zero bracket. The gift tax provisions now permit a total of $30,000 of what would otherwise be lifetime taxable gifts to move out free of any gift tax

'The historical background of estate and gift taxation is described in

(this is referred to as the lifetime gift tax exemption). When a donor is married and his wife consents to have one half of the gifts made by the donor to persons other than his wife charged to her for gift tax purposes, the lifetime exemption available to such husband-donor is in effect $60,000 (his $30,000 exemption plus his wife's $30,000 exemption). This lifetime exemption can also work the other way when the wife is the donor and her husband consents to have one half of her gifts charged to him for gift tax purposes.

Lifetime transfers of present interests to different donees do not count against the lifetime exemption except to the extent that on an annual basis they exceed $3,000 to a donee (this is referred to as the annual per-donee exclusion). The annual per-donee exclusion available to a married donor for gifts to persons other than his wife is really $6,000, if his spouse will consent to have one half of his gifts charged to her for gift tax purposes.

In addition to the annual per-donee exclusion, there is a 100% exclusion from gift taxation of the value of a transfer to a charity, and there is a 50% exclusion of the value of a transfer to the donor's spouse if the transfer is one that qualifies for the gift tax marital deduction. No gift tax is imposed on the creation of a joint tenancy or tenancy by the entirety in real property between husband and wife, unless the donor spouse elects to treat the transfer as a gift. Lifetime arrangements made by an employee with respect to the devolution on his death of employer contributions to a qualified employee benefit plan do not invoke any gift tax.

When the various exclusions from gift taxation are taken into account along with the lifetime exemption and gift splitting allowed husband and wife, it is clear that it is possible to move out in the form of lifetime transfers significant amounts of wealth without the imposition of a gift tax at all. The effective gift tax rate with respect to any particular donor will vary on the basis of the extent his program of lifetime transfers takes advantage of the exclusions from gift taxation.

When we look at the present estate tax structure that applies to deathtime transfers, we find a specific exemption available to all decedents of $60,000. This corresponds to the gift tax lifetime exemption of $30,000. But since the systems ordi

narily operate independently, consistent with this approach, the gift tax lifetime exemption, if not used up, cannot be carried over to increase the specific exemption of $60,000 applicable to deathtime transfers. A 100% exclusion from death taxation of charitable gifts is available, and the estate tax marital deduction excludes from death taxation gifts from the decedent to his spouse up to an amount that comes close to 50% of his gross estate" that are in an appropriate form. There is nothing in the estate tax field comparable to gift splitting allowed husband and wife in connection with inter vivos gifts to persons other than the donor's spouse. The portion of a qualified employee benefit plan that is attributable to employer contributions is completely excluded from estate taxation if it is not payable to the employee's executors. Various costs, of course, that arise in connection with the decedent's estate are deductible in calculating the net estate on which the tax will be imposed.

Present law permits the movement of the beneficial enjoyment of property through successive beneficiaries (the successive beneficiaries may be in the same generation or in lower generations) without the imposition of either a gift tax or an estate tax as this movement of beneficial enjoyment takes place. A gift or estate tax, of course, is imposed when the successive enjoyment arrangement is established, but the future passage of the beneficial enjoyment is not taxed. To accomplish the goal of eliminating gift and estate taxation on the future movement of beneficial enjoyment, the beneficiary enjoying the current benefits must not be in a position equivalent to that of complete owner. What is regarded as not such equivalence under present law, however, leaves room for fairly extensive controls in such beneficiary.

There is to be contrasted with the dual tax system the so-called unified transfer tax system. The fundamental difference grows out of the fact that under the unified tax there is a single rate schedule for all donative transfers, whether lifetime or deathtime, and lifetime transfers are fully taken into account in determining the beginning rate bracket at which

2 The maximum allowable estate tax marital deduction is 50% of the decedent's adjusted gross estate. The adjusted gross estate is the gross estate

deathtime transfers will be subject to tax. This fundamental difference will not be relevant in working towards a solution of some problems in the field of transfer taxation and will be relevant in others.

Another transfer tax system, referred to as an accessions tax system, differs fundamentally from both the dual tax system and the unified tax in that the rate of the tax is geared to the amount that is received over the years from various sources by the beneficiary, rather than to the total transferred by the donor.

The recommendations of the American Law Institute with respect to Federal estate and gift taxation are set forth in the material which follows. The recommendations are in forty-five separate resolutions which were adopted by the Institute. Each resolution states whether it is applicable under either a dual tax system or a unified tax or whether it is applicable only under one or the other. The Institute was not invited to consider the accessions tax system, in the view that a change to such a system is not now a feasible alternative.

The Reporter's Study of the dual tax system and the unified tax follows the presentation of the recommendations of the Institute. The views expressed in this Study are solely those of the Reporter, though he acknowledges his debt to the Consultants and the Tax Advisory Group for their valuable assistance. The Reporter's Study of the accessions tax system was prepared by the Associate Reporter and is his sole responsibility. This study is presented after the Reporter's Study of the dual tax system and the unified tax and it should be a significant aid to anyone who may desire in the future to move transfer taxation in that direction.

In the presentation of the recommendations of the Institute the forty-five resolutions are set forth first without comment to provide an initial picture of the scope and extent of the problems dealt with. The comments on the resolutions are then presented and after the comment on each subject the relevant resolutions are set forth again.

RECOMMENDATIONS OF THE AMERICAN
LAW INSTITUTE WITH RESPECT TO FEDERAL

ESTATE AND GIFT TAXATION

I. Resolutions Adopted

1. The value of what is received by a donee-joint-owner with the right of survivorship, where the donor makes a gift at the time the joint ownership was created, should be the value of his fractional interest, whether or not the right of survivorship is destructible by the unilateral act of the donee-joint-owner, under either a dual tax system or a unified tax.

2. The amount of what is transferred on the death of a joint owner should be his fractional interest, except where no gift was made at the time the joint ownership was created, under either a dual tax system or a unified tax.

3. There should be no exclusion from transfer taxation, under either a dual tax system or a unified tax, on the death of an employee on the ground that the transferred asset is an employee death benefit.

4. The term "incident of ownership" in connection with life insurance should not include a reversionary interest in the insured, under either a dual tax system or a unified tax.

5. The insured should not be deemed to have an "incident of ownership" where and to the extent such incident is exercisable by him only with the consent of a person who has a substantial interest that would be adversely affected by an exercise of such incident of ownership, under either a dual tax system or a unified tax.

6. There should be no major change in the present transfer tax rules with respect to powers of appointment, under either a dual tax system or a unified tax.

7. An expenditure should be excluded from transfer taxation as a lifetime transfer, under either a dual tax system or a unified tax, if the expenditure is for:

(a) the benefit of any person residing in the transferor's