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Extension of availability of previously taxed property credit. Under present law, if a gross estate includes property recently inherited from a prior decedent and the prior decedent's estate paid a tax with respect to the property, a credit is available to the second estate. A full credit is available if less than two years has elapsed between the two deaths. credit is reduced by 20 percent every two years, until no credit is available if the second death occurs more than ten years after the first.

The

Estate and gift tax reforms have been proposed that will generate additional tax revenue. The generation skipping proposals, in particular, can result in a tax for each generation rather than for every second or third generation, as is presently the case with large accumulations of wealth. Because of the greater and more frequent incidence of tax, the AICPA has concluded that the previously taxed property credit should be available for a longer period of time than the present ten years. The AICPA favors extending the availability of the previously taxed property credit. For the first five years after death a 100 percent credit for prior estate taxes would be granted. The percentage of the credit available would be reduced by five percent per year thereafter.

When a period of 25 years has

elapsed, no credit would be available.

Example. Assume that A dies in 1974 leaving his entire

estate to B, and B dies in 1978. B's estate will have a credit

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If B dies in 1984, ten years after A dies, the credit would be reduced to 75 percent of the taxes paid by A's estate, that is, 100 percent less 25 percent (five years at five percent). If B dies after 1999, no credit from A's estate would be available.

The period of twenty-five years was selected as representative of a customary period between generations. The gradual reduction in credit between five and twenty-five years was considered to be logical inasmuch as the second decedent would have enjoyed the inherited assets for some period of time. The transfer at his death should, therefore, be at least partially taxed.

This liberalization becomes logical if generation skipping is adopted. If a member of a "skipped generation" dies prior to his actuarial expectancy, his estate, under the AICPA proposals, must nevertheless include an actuarially computed amount. The liberalized credit results in fairer treatment in such cases of premature death.

Summary

The AICPA is opposed to a tax upon outright generation skipping transfers because the member of the skipped generation has no economic interest in the property. Further, the AICPA finds nothing socially or economically wrong with gifts or bequests that totally skip a generation. If a person has an economic interest, that interest should be subject to a tax at the time the interest terminates. The tax should be measured

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by the value of the person's estate as well as the value of the interest. An additional tax on the original settlor or on his estate is unfavorable, since this would cause an incorrect timing of the tax. Nor should taxpayers be required to make an election as to when the tax is payable or as to when the trust property should be valued. The AICPA is opposed to the IRS proposals because it does not believe that a new tax should be enacted. Rather, it is felt that the situation can be corrected by redefining the criteria that will result in inclusions in a gross estate or in taxable gifts. The IRS proposals may result in excessive complexity, lack of relationship of the tax to the economic interest subject to tax, and incorrect timing of the tax.

There are many situations not covered in this presentation. Only a basic concept necessary to solve a basic problem has been set forth. This basic problem is that, at present, a generation may have the benefit of corpus which is not subject to transfer tax when it is passed on to the next generation. To subject such corpus fully to tax when the generation has only a limited interest is, in opinion of the AICPA, inappropriate. The above proposals attempt to find a fair and equitable solution to a very real problem.

Current law allows a deduction to a donor or decedent for part of the value of property transferred to a spouse. Such a deduction, referred to as the "marital deduction," is limited in the case of a gift to one-half of the value of the gift, and in the case of an estate to one-half of the "adjusted gross estate." As a result of the marital deduction, an individual may transfer one-half of his separate property to his spouse tax free.

To qualify for the marital deduction, outright ownership of the property transferred generally must pass to the spouse so that, unless it is consumed or again given away, it will eventually be included in the estate of the surviving spouse. Such provision is referred to as the "terminable interest rule."

Discussion

General

Many practitioners and professional groups believe that the present structure of the marital deduction works a hardship on small to moderate-sized estates especially those estates where all the assets are bequeathed to a widow who must provide for herself and her children. Treasury Department studies indicate that a widow, on the average, survives her husband by ten

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years and it is felt that a tax, when property passes to a widow, imposes a difficult burden at a time when other significant income sources often disappear.

While it is generally agreed that adequate protection for widows and a reduction in estate tax on moderate estates is a necessary part of estate tax reform, there does not appear to be any reason for the deferral of estate taxes when property transferred to a surviving spouse is more than sufficient to satisfy her needs. An unlimited marital deduction, advocated by some groups, goes far beyond the objective of providing relief to a surviving spouse, and would be of greater benefit to larger estates than smaller estates.

Studies indicate that the adoption of an unlimited marital deduction would result in a permanent reduction of seven percent of the revenue from federal estate and gift taxes and an immediate revenue loss of as high as 17 percent since there would be a tax deferral until such time as the surviving spouse dies. Most of the other estate and gift tax reform proposals would result in an increase in revenue. Accordingly, a retention of the existing 50 percent martial deduction (with a modification for modest estates) would allow for an adjustment in the rate structure and exemption level which would not be dependent on the enactment of a provision for taxing appreciation at death. An unlimited marital deduction would tend to distort proper estate planning. In order to minimize the tax on the