35. An exemption of [$30,000] for the gift tax should be retained and of [$100,000] for the estate tax should be allowed under a dual tax system, in preference to lower exemptions that would permit lower rates in the various brackets in order to produce any required amount of revenue. 2. Annual exclusion Under the present gift tax law there is an exclusion of $3,000 per donee per year. With a consenting spouse with whom gifts can be "split," the effective annual exclusion is $6,000 per donee. While the annual exclusion was probably intended in large measure to exclude casual gifts, in practice it is frequently used to eliminate very substantial amounts of wealth from taxable estates. An exclusion of transfers for consumption and a 100% marital deduction would both operate to reduce the need for the annual exclusion to cover casual gifts. On the other hand, the annual exclusion, like exemptions, has remained at its present level for many years while price levels have risen generally. It serves in many cases to eliminate casual gifts whose status might be debatable as transfers for consumption. And some people believe that even when used to make substantial property transfers, the annual exclusion is desirable because it requires a planned program of regular lifetime transfers which will have the effect of vesting wealth in the younger generation, in reasonable amounts, sooner than would otherwise be the case. With respect to the annual exclusion the Institute adopted a resolution recommending that: 36. An annual per-donee exclusion of [$3,000] for presentinterest lifetime transfers should be retained, but with an annual per-donor limit of [$15,000] if an exclusion of transfers for consumption is adopted, under either a dual tax system or a unified tax. 24 An alternative resolution was rejected which read as follows: Resolved, that an annual per-donee exclusion of [$1,500] for presentinterest lifetime transfers be adopted, under either a dual tax system or a unified transfer tax, in preference to the present [$3,000] annual per-donee N. Transition Problems A continuance of a dual tax system with the significant substantive changes proposed presents some transition problems. A change to a unified tax obviously will raise more significant transition problems. 1. Effect of Prior Lifetime Transfers on Amount of If a dual tax system is continued, even with the extensive modifications proposed, there would seem to be no need to give everyone a fresh start with respect to the lifetime exemption for lifetime gifts. It is true that some of the lifetime exemption may have been used in making gifts to the donor's spouse and under the new provisions such gifts could have been made without using up the lifetime exemption because of the 100% marital deduction. However, general principles of fair play in the tax field require only that under a continuance of a dual tax system, modified as proposed, a person will have available the amount of whatever new lifetime exemption is adopted (if any), less the amount of prior gifts that were properly chargeable against the old lifetime exemption. If a shift is made to a unified tax, then the situation is quite different. When a person used up his lifetime exemption by lifetime transfers under present law, he did so with the expectation that it would not affect the exemption that would be available for deathtime transfers. Thus, fairness demands, under a shift to a unified tax, that everyone should move into it with an exemption available that is unimpaired by past transfers so far as deathtime transfers are concerned. This could be accomplished by counting past transfers in determining how much of an exemption would be available for future lifetime transfers but not counting them in determining the exemption that will be available for deathtime transfers. The simplest way, however, is to give everyone a completely fresh start under the unified tax. 2. Effect of Prior Lifetime Transfers on the Rate Bracket at which Future Transfers Begin For similar reasons, prior taxable lifetime transfers should be treated differently under a unified tax than under a dual tax system. Clearly, under a unified tax the prior lifetime transfers must be ignored in relation to deathtime transfers because they were made at a time when they would not affect the beginning rate for deathtime transfers. A hybrid system whereby they counted for future lifetime transfers but not for deathtime transfers could be worked out, but would be unduly complicated. Under a continuation of the dual tax system, even if prior lifetime transfers continue to count, the beginning rate applicable to deathtime transfers should not be affected (at least as long as the taxed lifetime transfer is not treated as a deathtime transfer). It may be that due to the difference in the rate bracket applicable to lifetime transfers under the present rate schedule and the new schedule, prior lifetime transfers, if counted in applying the new schedule, would place a person in lower or higher brackets under the new schedule. But this is true of any rate change, and it has never been thought that a mere change in rates would justify a fresh start under the gift tax. 3. Effect on Existing Property Arrangements of Existing property arrangements may have been made under instruments that are still changeable by the transferor. This would be true of outstanding revocable trusts and outstanding wills. Although these documents are changeable, experience tells us that it takes time for transferors to make such changes as might be desirable in the light of extensive changes in substantive law. It is recommended that after the passage of some reasonable period of time, the taxation of property arrangements governed by changeable documents should be governed by the new law. The more difficult problem relates to the treatment of tinue operative as to them, then for many years to come, a familiarity with the old law as well as with the new will be essential. Yet it may be unfair, at least in some instances, to subject these existing arrangements to the same transfer tax treatment that would be applicable if they had been established with knowledge of the new law. This transition problem exists if extensive substantive changes are made under a continuation of a dual tax system as well as under a shift to a unified tax. 4. Effective Date of New Substantive Changes The considerations affecting effective date are different for different substantive changes. Unification, if adopted, should become effective some reasonable period after enactment to give anyone who has not already done so a chance to take advantage of the old gift tax law before unification becomes effective; otherwise those who already have done so would be unduly advantaged. From a revenue point of view, this position will produce some revenue loss on death, but will cause a shortterm immediate bulge in gift-tax revenue. The elective feature in the 100% marital deduction should eliminate any unfairness in making this change immediately effective. These is no reason why a new rate schedule should not be effective immediately, except that if the unified tax is adopted, the new rates should not be available to a person taking advantage of the opportunity to make last-minute gifts under the old law. Whether a transfer was completed prior to the effective date of the new law should generally be tested under the old law. With respect to transition problems the Institute adopted resolutions recommending that: 37. Under a continuation of the dual tax system, the lifetime exemption for lifetime transfers should be the lifetime exemption for gifts under the new law, less the amount of prior gifts properly chargeable against the lifetime exemption under the old law. 38. Under a continuation of the dual tax system, prior taxable lifetime transfers should be taken into account in locating the bracket under the new gift tax schedule that is to apply to future lifetime gifts. 39. Under a unified tax, prior transfers should be ignored entirely in regard to the exemption available and the beginning rate bracket applicable to future lifetime and deathtime transfers. 40. The effective date for unification should be some reasonable period after enactment so that there would be a period between enactment and effective date when gifts could be made under present law. 41. A 100% tax-free interspousal transfer rule, if enacted, should be effective immediately upon enactment. 42. Any new rate schedule should be effective immediately upon enactment, except that in the event of unification the old gift tax rate schedule should be in effect for inter vivos gifts until the effective date for unification. 43. In the case of any transfer prior to the enactment of the new law which was complete under the old law, no tax should be imposed under any provision of the new law until an event occurs (such as the exercise or release of a power of appointment) that would have been subject to a further tax under the old law. 44. In the case of property transferred prior to enactment of the new law, but which would have been included in the transferor's estate on his death under the old law, the property should be taxed as a transfer at death under the new law whether or not it would be so treated under the terms of the new law, but there should be a credit for any gift tax previously paid as provided in the present law. O. Retention of Dual Tax System Versus Change to Unified Transfer Tax The preceding material has presented recommendations for significant substantive changes in the transfer tax laws whether a dual tax system is retained or a change is made to |