STATEMENT OF TAX POLICY ESTATE AND GIFT TAX REFORM Issued by: of the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS February 1, 1976 SECTION I GENERATION SKIPPING TRANSFERS Background Under current law, a person may transfer property by gift or bequest to a lineal descendent more than one generation removed from himself (for example, a grandchild) and, as a result, the transfer tax is not paid by the intervening generation. In addition to outright transfers, a settlor may make a taxable transfer of property and not have the property subject to transfer tax again for several generations with the use of trust instruments which satisfy the rule against perpetuities. This is true although some elements of beneficial enjoyment of the property accrue to the intervening (or skipped) generations. Discussion General 1 The U.S. Treasury Department Tax Reform Studies and Proposals dated February 5, 1969, pertaining to estate tax, recommended a tax upon generation skipping transfers. It was proposed to impose a "substitute" tax, in addition to the present transfer taxes, if property is transferred to a grandchild or more remote generation. This tax upon generation U.S. Treasury Department, "Tax Reform Studies and Proposals," A Treasury Tax Study (Washington, D.C., Feb. 5, 1969), hereinafter referred to as 1969 Treasury Proposals. All subsequent direct citations of this report will be indicated by page 2 skipping (GST) would apply to outright transfers as well as transfers in trust. The tax would be 60 percent of the basic transfer tax unless the member of the "skipped" generation elected to treat the transfer as a gift or bequest to him and a simultaneous gift to the next generation. Position of other professional groups It On April 30, 1968, the American Law Institute (ALI) issued 2 a report entitled Federal Estate and Gift Tax Project. was therein reported that the Council to the Members of the ALI approved a resolution to recommend a GST only upon a very limited class of transfers. Basically, the ALI proposal was to have a GST only upon transfers in trust that would vest in a younger generation at a time subsequent to the time of death of the immediately succeeding generation. In other words, if the trust provided for income for benefit of a child and the remainder to a grandchild upon the death of the child, there would be no additional tax. If, however, the trust continued after the death of the child with the remainder to a great-grandchild upon the grandchild's death, there would be an additional tax. The American Bankers Association (ABA) would also limit the GST solely to transfers in trust. The ABA, in general, would impose a GST only if the transfer skips more than one generation. 2 Published as Federal Estate and Gift Taxation: Recommendations Adopted by the American Law Institute at Washington, D.C., May 23-4, 1968. - 3 Proposals The AICPA's position is that there should be a tax upon transfers in trust that skip a generation, and it favors a limited inclusion in the estate of the member of the skipped generation, provided such person had a beneficial interest in the trust. The AICPA, therefore, makes the following proposals. No separate generation skipping tax on testator or settlor. To the extent that there would be a tax on the property passing to a grandchild or later generation, such tax would be computed by including a value in the gross estate of the "skipped" person. The tax would be due at the time that person's estate tax is due. Thus, no additional tax would be due from the settlor of an inter vivos gift in trust nor from the estate of the creator of a testamentary trust. The tax would be payable from the corpus of the trust. If a generation obtains its interest in the trust or the property in a manner other than by death of the skipped generation (such as after a term certain), the tax would be payable at the time of transfer of interest as though the generation whose interest had terminated had made a gift. No additional tax on outright gifts or bequests. Only gifts in trust would be included in the gross estate of the "skipped" person. Also, only to the extent that the "skipped" |