the property "vests" in a person more remote from the transferor than a grandchild or at a later time than the death of the last living child of the transferor. The tax would be paid from the trust property and be determined by inclusion of the trust property in the transfers of the "skipped" beneficiary-usually a child of the transferor.

The effect of the ABA proposal, in the context of a trust for descendants of the transferor, would be to shorten the period during which trust property may be kept outside of the transfer tax base from as much as 100 years to a period not to exceed the life or lives of children of the transferor. The ABA proposal would not inhibit in any way the use of a flexible trust through the creation of various powers in the trustee and/or beneficiary, such as powers of appointment and discretionary powers to pay income or principal among a class of beneficiaries. A more detailed explanation of the proposal is con

tained in Appendix A.

UNIFICATION

Current Law

Generally speaking, an estate tax is imposed on transfers at death and a gift tax on transfers during life. Each tax has a separate rate schedule and a separate set of exemptions. The effect of a gift is to remove property from the top estate tax rate at the cost of a gift tax computed in almost all cases at a substantially lower gift tax rate. As a consequence a tax advantage is derived from gifts under current law. The existing dual system has been criticized as preferring the wealthy individual who can afford to make gifts over the less well-to-do individual who cannot afford to do so.

Proposals for Change

Two proposals for changing the present dual estate and gift tax system

have been made:

First, to "unify" the estate and gift tax laws. As suggested in the Treasury Studies, this proposal would have three facets. One, transfers during life and at death would be subject to one set of rates that would be applied cumulatively. To give a simple illustration and ignoring exemptions, if a man transferred $50,000 during his lifetime this amount would be subject to tax at the lowest rate and upon his death the initial rate applicable to his transfers at death would begin with the rate applicable to $50,000. Two, a "grossing-up" concept would be created under which an individual making a gift of property during his lifetime would be subjected to transfer tax not only on the value of the property transferred but also on the transfer tax itself. Under current law, an individual making a gift pays a gift tax only on the amount of the gift. Three, a shift would be made from what is now a "hard-to-complete" rule on the time of imposing the tax to an "easy-to-complete" rule. Under the current "hard-to-complete" rule, a transferor may remove trust property from his gross estate only if he gives up both beneficial enjoyment of the property and the right to control who will receive the income or principal of the trust or the time of its enjoyment. Under an "easy-to-complete" rule a transferor could retain control over, but not beneficial enjoyment of, the trust property and still not have the property included in his transfers at death.

Second, to retain the existing dual structure but to compute the estate tax payable by, in effect, including the amount of the decedent's taxable gifts in his gross estate for the purpose of determining the applicable estate tax rates. The estate tax payable would then be the difference between (1) the estate tax

that would be payable on his taxable estate plus an amount equal to his taxable gifts and the gift tax paid, and (2) the estate tax that would be payable if his taxable estate consisted only of his taxable gifts and the gift tax paid.

ABA Comments

The ABA opposes the "grossing-up" concept as being an inappropriate way of taxing a lifetime transfer, which is different from a transfer at death. Also, we see no reason to impose this complication, which would introduce an algebraic formula into the tax computation, and the confusion that would result for the sake of logical symmetry in the method of determining the tax on lifetime transfers and deathtime transfers.

With respect to shifting from a "hard-to-complete" to an "easy-to-complete" transfer tax rule, we believe that as a matter of tax policy such a shift is wrong. An individual should not be permitted to insulate future appreciation or income accumulations from transfer tax when he retains control over the transferred property. There is another reason why we oppose an "easy-to-complete" rule. It will involve changing present estate tax law which is now reasonably clear in its effect after many years of interpretation. provable advantage to the "easy-to-complete" rule, the time spent in shifting from existing law to the new approach is an unproductive use of time and money. A shift to an "easy-to-complete" rule is usually justified on one or both of two premises. We believe that each of the premises is incorrect.

Unless there is a

The first premise is that although we have struggled for many years to draw a line between complete and incomplete transfers, using a "hard-to-complete" approach, we have the skill to draw an "easy-to-complete" line which is free from doubt. Our experience with tax law makes us doubt that this is true. A

line between a taxable transaction and a non taxable transaction is always hard to draw. We should not abandon the knowledge which we have painfully acquired over the years regarding the "hard-to-complete" rule.

The second premise is that since all transfers will be subject to a single rate schedule even an imprecise dividing line will not generate controversy.

This is erroneous.

If an individual makes a lifetime transfer and the property appreciates in value, it is to the Government's advantage to take the position that the transfer is a deathtime rather than a lifetime transfer. Under existing law, increases in value between the time of transfer and the time of death, more than rate differentials, cause the Government to challenge the time of completion of the transfer. An "easy-to-complete" rule will not change this situation unless the law is drafted so that, if an individual makes a transfer during life and pays a tax, the Government is estopped from raising the question of the time of completion of the transfer for transfer tax purposes. Absent such an objective test, existing law is superior because of the knowledge acquired as to the time of transfer. Further, we do not think that the Government should make such a concession.

The second and simplified "unification" proposal discussed above is unsatisfactory in that it would not be accompanied by a reduction in estate tax rates and the person of modest means who does not feel able to make lifetime gifts would not be benefited by the change.

ABA Alternative

The ABA believes that the simplified "unification" proposal discussed above is worthy of consideration, but only if the current estate tax rate schedule is

for the person of relatively modest means who cannot "afford" to give property away during his lifetime. The present rules which permit a "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, should be eliminated by in effect allowing a refund of the gift tax paid on the gift. For the reas asons given above the ABA favors retention of the "hard-to-complete" transfer tax rule.

MARITAL DEDUCTION

Current Law

A marital deduction of 50% of a decedent's adjusted gross estate is available for property passing to a surviving spouse. This deduction is also available for lifetime transfers to a spouse subject to the same 50% limitation. In order to secure the deduction, the spouse must be given the unrestricted right to control the disposition of the qualifying property either during life or at death. Current law has been criticized both quantitatively and qualitatively, and also as being unnecessarily complex. As to quantity, it is contended that spouses view property owned by each of them as "their" property and that a tax should not be imposed until both spouses have died. As to quality, the contention is made that the transferor spouse is put to an unfair and unnecessary choice in that in order to obtain the deduction the other spouse must be given control over the marital deduction property and this may not be desired, particularly in cases where there is a second marriage and children by a first marriage.