Proposals for Change

The Treasury Studies and the ALI recommended liberalization of the marital deduction provisions in terms of both quantity and quality; no limit would be placed on the amount of property which could be transferred free of transfer tax between spouses and a life estate (or income interest), viz., a current beneficial interest in property unaccompanied by a power of disposition (appointment) in the spouse would be permitted to qualify for the deduction.

ABA Comments

The recommendations of the Treasury Studies and the ALI are appealing. They do, however, present some significant problems. With regard to an unlimited marital deduction the problems are twofold. First, a complete exemption from tax for transfers to a spouse would encourage such transfers at the expense of transfers to other members of the transferor's family. When the spouse will need all of the income to live on--as will usually be the case with the small and medium size estate--this result should not have an adverse effect. However, in the case of a large estate, where the income is more than sufficient to satisfy the spouse's needs, the tax "pull" of avoiding all tax may lead to unwise dispositions ignoring other family members, at least until after the spouse's death. A shift to a current beneficial enjoyment theory for marital deduction qualification would be helpful, particularly in cases of second marriages and children by a first marriage, in permitting the first spouse to die to control the disposition of the property after the surviving spouse's death. Nevertheless, the problem will to

some extent remain. Second, when a part of the estate is more than sufficient to satisfy the spouse's needs we question whether postponement of the collection of all tax as a result of an unlimited marital deduction should be permitted.

With regard to the current beneficial enjoyment test, one problem is "forcing" transfers upon the surviving spouse as a result of the termination of the current beneficial interest prior to death. In such a case, other subsequent transfers by that spouse will result in a higher tax because the "forced" transfer will push the later transfers into higher transfer tax rates. This problem could be eliminated by requiring that the spouse's interest cannot be terminated during life without his or her consent.

We have encountered among our members a substantial amount of opposition to a shift to a current beneficial enjoyment test. A change is opposed because: 1) It will result in considerable litigation even though it resembles the income requirement of a marital deduction trust under current law.

2) It will produce undesirable complexity because of the absence of cotrol in the surviving spouse through a power of appointment and the fact that the same type of interest may both qualify and not qualify for the de

duction.

3) It will tend to produce an inconsistency between the estate tax law and applicable elective share laws of a majority of common law states under which a surviving spouse is entitled to an outright share of a decedent's estate.

4) It will create a further disparity in property dispositions between community property and common law states. Under community property laws, a surviving spouse must receive control of her half of the community property and under current law the surviving spouse in common law states must receive this control in order to qualify the property for the marital deduction.

5) It will produce more conflict between the surviving spouse and the remaindermen over what is an appropriate level of income, particularly in the

case of second marriages where an adversity is more likely to exist between the spouse and the remaindermen.

6) It will raise some technical problems regarding its application to annuities which are avoided if current law is retained.

ABA Alternative

The ABA suggests that the current marital deduction law be modified quantitatively to permit qualification of the greater of $250,000 or 50% of a decedent's adjusted gross estate but that no qualitative change be made.

Future developments may, of course, cause a change in our thinking concerning the matters that have been discussed.

APPENDIX A

Explanation of ABA Proposal

Imposing a Tax on Certain Trust Transfers

The ABA solution is to subject to transfer tax the "value of property passing" to a "beneficiary's" "descendants" upon a "termination" or "distribution" by imputing ownership to the beneficiary of the property so passing unless an "excluded transfer" is present. Each of the quoted terms is given a defined meaning. Three of these terms, "termination", "distribution" and "excluded transfer" are of primary importance.

Their meanings may be summarized as follows:

a transfer causing property to cease to be a part of a

any occurrence, other than a distribution, causing a person

to cease to be a beneficiary of a trust. The occurrence will usually be the

beneficiary's death.

Excluded Transfer

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this term is defined separately for distributions and terminations. Any distribution to a child or grandchild of the transferor or to a person no more than two generations below the transferor is an excluded transfer. Any termination is an excluded transfer if immediately after such occurrence there is a beneficiary of the trust who is no more than one generation below the transferor.

tion.

A payment of current income is not treated as a distribution or a termina

The general scope of the excluded transfer provisions may be illustrated by two examples:

Example 1. A creates a trust with income payable to his son B for life,

remainder upon B's death to his then living issue, per stirpes. Any property distributed to a grandchild of A upon B's death is an excluded transfer.

Example 2. A creates a trust to continue until the death of the survivor of his three children, with the income to be distributed currently to any one or more of the issue of A then living as the trustee determines and the principal to be paid upon the death of the last surviving child to A's issue then living, per stirpes. No payment of current income, even if made to a greatgrandchild of A, is subject to transfer tax. The terminations caused by the deaths of the first two children to die or by the death of any grandchild or more remote descendant of A (each of whom is a "beneficiary") are excluded transfers. At the death of the last surviving child the "termination" excluded transfer provision would not apply, but the "distribution" excluded transfer provision would apply to the extent trust property is distributed to a grandchild of A. If at the death of the last surviving child trust property is distributed to a great-grandchild of A, a transfer tax will be paid with respect to such property.