SUMMARY OF MARITAL DEDUCTION COMMENTARY

Current Law

Current law allows property transferred either outright or subject to the control of a spouse to qualify as a deduction against either estate or gift tax. There are quantitative limits on this deduction which for estate tax is one-half of the decedent's gross estate after debts and expenses, and for gift tax is one-half of any qualifying transfer. Both requirements have been criticized; qualitatively--that the deduction should be available even though the owner spouse retains control over the ultimate disposition of the property; quantitatively--that all qualifying property should be able to avoid the estate tax until the death of the surviving spouse.

Major Proposals for Change

Proposals for changes in the law in both the Treasury Studies and ALI Project recommend: (1) no quantitative limit; and (2) a qualitative dilution in that a transferee spouse would not need to control the property transferred for it to qualify for the marital deduction but merely have a "current beneficial interest" (an income interest) in the property. Vesting of a succeeding interest in the

property in someone else would occasion a transfer attributed to the transferee

spouse.

ABA Evaluation

The ABA opposes an unlimited marital deduction since this could cause unwise dispositions to achieve a temporary tax advantage at the expense of other family

provisions, and because the ABA thinks it poor tax policy to allow very large estates to postpone all taxes until the surviving spouse dies.

The ABA believes the problems presented by the "current beneficial interest" theory outweigh its benefits.

ABA Alternative

The ABA suggests that there be a quantitative change to allow the greater of $250,000 or one-half of a decedent's gross estate to be eligible for the

marital deduction but that no major qualitative change be made.

Exemptions; Level of Taxation; Farms and Closely
Held Businesses

Current Law

While the estate and gift tax exemptions ($60,000 and $30,000respectively) and estate and gift tax rates have remained constant since 1942 inflation has severely eroded the purchasing power of the dollar. The estate tax has ceased to be only a rich man's tax now significantly impacts the middle class. In many cases the family residence alone, although purchased at a modest cost by today's standards, will require the filing of an estate tax return. The only relief from its impact during this 34 year period occurred indirectly in 1948 as a result of the enactment of the marital deduction, which permits postponement of the tax on 50% of estate until the death of the surviving spouse.

The estate tax reaches a 30% rate at a taxable estate of $100,000 and creates particular hardship for estates with farms and other closely held businesses. In some cases a sale is required to pay the tax, even though the decedent's family would like to continue the operation of the business. This result has been criticized with increased frequency in recent years.

Major Proposals for Change

In recent years, and particularly in this Congress, bills have been introduced to provide estate tax relief. Two major types of changes with significantly different revenue impacts or a combination of both have been proposed:

1. Increase the estate tax exemption. Figures in the range of $100,000 to $400,000 have been suggested.

2.

businesses.

Restrict the relief to estates with farms and other closely held

Some bills would exempt from all tax farms not exceeding a stated value. Other bills would create a special valuation method for such assets. In order to qualify, the farm or other business would have to be operated by the heirs for a stated period, usually five years, both before and after a decedent's death.

The Administration has recently proposed a five year moratorium on the payment of estate taxes on certain farms and other closely held businesses. No interest would be paid during the five year period. The payment period would be extended from the current 10 year period to 20 years after the end of the moratorium. The special 4% interest rate on deferred estate tax, which was eliminated last year, would be reinstated. Eligibility would be limited to

$300,000 of assets, with a dollar for dollar reduction from $300,000 to

$600,000.

ABA Comments

Our member banks in farms areas have confirmed the fact that a substantial number of farm sales are made by estates and that the number has been increasing in recent years. The primary reason for the accelerating sales is that the value of farm land has been increasing rapidly. For example, we have been advised by one of our member banks that in southern Illinois the value of farm land has increased by 150% during the past 18 and 24 months. serious cash problem may not be payment of the estate or death taxes, but rather "buying out" the child or children who will not continue in the business. When there is a surviving spouse, the cash problem is less serious because of the availability of the marital deduction which can reduce the estate tax impact

The most

by more than 50%. This problem is often more difficult for a non-farm closely held business than a farm because sale of the business is more difficult than

sale of a farm.

One important question in considering the farm and closely held business problem is in what percentage of cases does a family member desire to continue the operation of the farm or other business. Random inquiries made to some of

our member banks suggest that with farms a family member want to continue actively in its operation in not more than 25% of the cases. This conclusion confirms the belief of people specializing in the farm estate planning area that today most farm operations are "born" and "die" within a lifetime.

The ABA believes that a sound solution to the farm and closely held business problem should be based upon the following four objectives which are not consistent with each other and must be weighed in terms of their individual

importance:

1. Making it possible for retention of these assets by the family when they desire to do so and continue an active participation in the business;

2. Not creating a tax incentive of such magnitude (a) that "outsiders" will acquire these assets, (b) that family members will tetain assets which should be sold because they cannot be operated with a reasonable profit, or (c) that provide unreasonable distinctions in the treatment of different assets, particularly in the minds of owners of other assets;

3.

Minimizing the revenue loss from the tax law changes; and

4. Not further complicating the law.

The first objective does not include cases where the heirs desire to retain the asset as an investment but not to participate in the the active