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over a period of years, as is common, the income tax comes in over a longer period of time.

If the 100% marital deduction is adopted, the effect of including employee death benefits would be significant only when they are payable to someone other than the employee's wife. The change would be more significant under a continuation of the 50% marital deduction. Indeed the view was expressed by some that inclusion of employee death benefits should be conditioned on adoption of a 100% marital deduction.

One of the problems of including employee death benefits in the estate tax base, if the payout of such benefits is over a period of years, is that the estate tax is payable on the full value of the installments and may have to be paid before all the installments have been collected. The tax when it is due may exceed the amount collected up to that time. This problem, of course, already exists under present law in connection with other deferred payment arrangements that are subject to estate taxation. The present Sec. 6163(b) of the Code, which allows a deferral of the tax in cases of undue hardship, may be adequate to take care of the cases where relief is really needed.

The proper treatment of employee death benefits is not much affected by the choice between a dual tax system and a unified tax. Under either, employee death benefits, whether under a qualified plan or not, should be treated as representing a deathtime transfer, even if fixed dispositive arrangements have been made during life. Otherwise, a lifetime tax would be assessed on funds not available until the donor's death, and this would place an undue burden on the employee in planning for the devolution of such benefits.'

With respect to the employee death benefit problem the Institute adopted a resolution recommending that:

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.

See pp. 41-47 infra, as to the line between lifetime and deathtime transfers generally.

C. The Life Insurance Problem3

Internal Revenue Code Sec. 2042

The Institute was not invited by the Reporter to consider in depth the present rules applicable to estate and gift taxation of life insurance, in the view that no major change of legislative policy would gain adequate support. There are, however, two technical problems in the treatment under present law of an "incident of ownership" that it is thought should be resolved.

First, if the insured retains an incident of ownership in a policy until his death, the entire proceeds are subject to transfer taxation on his death as a transfer from him to the beneficiary under the policy. This is the so-called incidents-ofownership test. Under present law, if the insured has a reversionary interest in the policy, even though he has given up all other incidents of ownership, the reversionary interest is deemed an incident of ownership and the proceeds are includible in his gross estate for estate tax purposes on his death, if the value of his reversionary interest exceeded 5% of the value of the policy immediately before his death. The reversionary interest as an incident of ownership is something of arap in connection with the transfer of the ownership of a policy, and the 5% test is extremely difficult to apply. Elimination of the reversionary interest as an incident of ownership would not create any significant tax loop-hole and it would simplify the law. If a reversionary interest is not treated as a retained incident of ownership, then it should also not be treated as a retained interest for the purpose of fixing the amount of the lifetime transfer.

Second, under present law, although the insured can exercise an incident of ownership only with the consent of another, no matter who that other is, the retention of that incident will keep the proceeds in his gross estate for estate tax purposes. If the exercise of an incident of ownership requires the consent of one who has a substantial interest in the policy that would be adversely affected by such exercise, then it is recommended that

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For additional discussion, see Reporter's Study, at pp. 104-105 infra.

The Reporter did, however, explore a number of these problems with the

the situation be treated as if the incident of ownership rested solely in the owner of such substantial interest. If the one whose consent is required has only a partial interest that could be adversely affected, then the insured would be considered to have an incident of ownership in all but such partial interest. With respect to the life insurance problem the Institute adopted resolutions recommending that:

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.

D. The Powers-of-Appointment Problem'

Internal Revenue Code Secs. 2041 and 2514

Powers of appointment in a transfer that creates a succession of limited beneficial interests give a flexibility to the arrangement that permits adjustments to meet changed conditions. A rigid and inflexible plan of successive limited interests is likely to be inadequate to meet the conditions of the future under which it will operate. The present transfer tax law is quite liberal in the controls the owner of a limited interest can be given without causing him to be treated as the owner of the appointive assets for transfer tax purposes.

This liberality contributes to the generation-skipping problem later considered (see page 26). But a tightening of the power-of-appointment rules to cause the powerholder to be treated as the owner of the appointive assets in more situations than at present would simply tend to drive property arrangements into the more rigid mold, if the more rigid mold avoided the burdens of transfer taxation. Therefore, the generationskipping problem should not be resolved by drawing a different line than now exists in the power-of-appointment area. Rather,

For fuller discussion, see Reporter's Study, at pp. 97-104 infra.

a solution should be adopted that applies equally to the rigid and nonrigid arrangements.

The power-of-appointment field has been the subject of extensive review and revisions by Congress on various occasions. It is not believed that a re-examination of the rules as to transfer taxation of powers would be fruitful. This is true whether the dual tax system or unified tax is involved.

With respect to the powers-of-appointment problem the Institute adopted a resolution recommending that:

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.

E. The Transfer-for-Consumption Problems

No present Internal Revenue Code provision

There is at present a major area of common misunderstanding about the gift tax consequences of responding to the needs of various persons for help; of responding to personalized charity as distinguished from public charity. It is not generally understood by the average person that a gift tax may be payable if he provides a child with educational benefits beyond those he is legally obligated to provide, or if he pays a sick relative's doctor's bill.

The expenditure of funds by a member of a family in discharge of his legal obligations to support another member of the family does not involve a taxable gift for gift tax purposes and clearly should not. The expenditures that are deemed in discharge of a legal obligation to support another, however, are determined on the basis of local law, and local law is neither uniform nor clear on this matter. Thus, to the extent the freedom from gift tax liability is founded on the legal-obligation test, the federal gift tax is imposed on some and not on others in identical circumstances, solely because there is a difference in their geographical locations.

It is proposed that there be excluded from gift taxation various so-called "transfers for consumption," without regard to whether they in fact involve a discharge of a legal obligation to support. This will tend to eliminate the significance of differ

ences in local law as to what constitutes a legal obligation to support another, and thus cause the transfer tax law to be applied in substantially the same way in all states.

On this issue, there does not appear to be any important difference between a dual tax system and a unified tax. It is, of course, less important under a dual tax system whether an item is included as a gift, because inclusion will not affect the beginning rate applicable to deathtime transfers. Nevertheless, the problem here is basically one of responding to normal family reactions in regard to intra-family movement of property, and this reaction is not affected by whether a dual tax system or a unified tax is in effect.

The "transfer-for-consumption" proposal has no significance so far as transfers for consumption from a husband to his wife are concerned (or vice versa) if the 100% marital deduction is adopted. If the 100% marital deduction is not adopted, then this proposal should apply to such transfers.

The proposal as to transfers for consumption is applicable only to lifetime transfers. The considerations behind the proposal do not carry over significantly to deathtime dispositions. This, of course, is also true of the annual per-donee exclusion which is not available with respect to deathtime transfers.

A "transfer-for-consumption" exception may raise some difficult factual issues in borderline situations, but most situations will fall clearly on one side of the line or the other. The creation of the difficult borderline area is justified to accomplish the larger benefit of excluding typical transfers that are motivated by considerations other than the build-up of wealth in the transferee. When such a transfer occurs it should, of course, be immaterial whether payment is made on behalf of the transferee or to the transferee for the designated purposes.

With respect to the transfer-for-consumption problem the Institute adopted a resolution recommending that:

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 household, or the benefit of a child of the trans

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