ABA Alternative As an alternative, the ABA recommends the AET, an additional or appreciation estate tax, which would be a flat rate tax reported in the Federal estate tax return but have a separate and equivalent exemption (currently $60,000). Since the AET would not be a deduction against the estate tax, its tax effect would not be regressive. It also would be more simple administratively because the tax is computed independently. The AET rate would be set so that the tax paid would be the same as the largest estates would pay under the Capital Gains tax proposal while smaller estates would pay less. Because the ABA considers the current "cost of dying," including state taxes, high enough, the ABA suggestion of an AET is conditioned upon both (1) a new cost basis Valuation Date for all assets in computing the AET, and (2) a reduction of Federal estate taxes comparable to the projected AET collections. Thus, the AET would permit lower estate taxes on all estates, and reduce the "cost of dying" for those estates, usually smaller in size, which contain few appreciated assets. SUMMARY OF GENERATION-SKIPPING COMMENTARY Current Law Current law imposes a tax on the transfer of unfettered control over property, and a shift of interests in property without such a change in control is not a taxable event. Since the time span of interests in property is not significant, a trust embodying a succession of interests lacking the control element may be insulated from Federal estate or gift tax for 100 years or more. To thwart this tax delay, the theory is espoused that all property should be subject to estate tax every generation, and that trusts which do not create taxable interests in the next generation should bear an added tax burden. Major Proposals for Change descendant. The 1968 Treasury Studies would assess a tax at 60% of the transferor's top rate on any transfer made outright or from a trust to a grandchild or more remote The ALI Project would not levy an extra tax on outright transfers but, using the same general approach as the Studies, would do so on trusts which may distribute to grandchildren or more remote descendants at a time later than the deaths of the transferor's children. ABA Evaluation A person should be able to Family includes ancestors, spouse, Both of the above proposals are objectionable. provide for his family without a tax penalty. children, and grandchildren. Outright bequests to grandchildren should not be penalized, and the tax rate on transfers in trust should not be determined by ABA Alternative - Any change in the taxation of trust transfers should be accomplished in such a manner that a person may create a trust having his Family ancestors, spouse, children, and grandchildren his - as its beneficiaries without the imposition of an additional transfer tax when compared with current law. The additional tax should be limited to the long-term trust where the property "vests" in a person more remote from the transferor than a grandchild or at a time later than the death of the last living child of the transferor. The tax would be paid from the trust property and should be determined by inclusion of the trust property in the transfers of the skipped beneficiary--usually a child of the transferor. The result of the ABA alternative would be to eliminate the excessive insulation of trusts from taxation and permit them to be used in a normal way for the benefit of a person's Family without a tax penalty. SUMMARY OF UNIFICATION COMMENTARY Current Law Current law provides a separate tax rate structure for lifetime transfers (gifts) and transfers at death. Because each tax rate is progressive, a person can incur gift taxes at relatively low rates and remove property from exposure to higher estate tax rates. Further, the fact that the gift tax is both a deduction in computing, and a credit against, the estate tax can be deliberately exploited to achieve substantial tax savings by taxable transfers just before death despite their inclusion in the estate. Major Proposals for Change The 1968 Treasury Studies recommend: (1) all transfers should be cumulative and be subject to one set of tax rates; (2) all lifetime transfers should be increased for computation purposes by the tax the transfer caused (a "tax on a tax" procedure called "grossing-up"); and (3) a change in the law to allow transfers to escape taxation at death even though control is retained so long as a tax was paid at time of transfer and the property could not be regained by the transferor ("the easy-to-complete" transfer rule). Another proposal, which is a "simplified" unification approach, would retain the dual rate structure but would treat all transfers after its effective date as cumulative for purposes of determining the level of the estate tax rate to apply. The ALI Project took no position on a single rate structure applicable to all transfers but did say that a condition to such a change should be a reduction in current estate tax rates. ABA Evaluation The "grossing-up" concept is unnecessarily complicated and actively discourages lifetime transfers. The "easy-to-complete" theory is no improvement, but rather a step backward, when compared with current law in terms of certainty of operation and sound tax policy. The simplified unification proposal has the virtue of reducing the tax advantage currently enjoyed by persons able to make gifts during lifetime, but offers no lowering of estate taxes to those smaller estates unable to make gifts, which the ALI Project considered the primary justification for shifting to a single rate schedule. ABA Alternative Provided there is a reduction of estate tax rates, the ABA would not oppose the "simplified" unification approach combined with the elimination of the "double deduction" for the gift tax paid on a gift in contemplation of death, viz., a gift tax credit and a deduction in computing the estate tax by in effect allowing a refund of the gift tax paid on the gift. These changes would both benefit the smaller estates unable to make gifts and end the tax reduction currently permitted in the case of deliberate transfers in contemplation of death. |