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property to the surviving spouse. In estates of any substance, the transfer of all property to a surviving spouse, particularly when there are children, should not be encouraged. Under an unlimited marital deduction, deferral possibilities resulting from remarriages can be carried to ludicrous extremes.

Adoption of an unlimited marital deduction appears to make the adoption of a beneficial enjoyment theory essential. Under an unlimited marital deduction, the beneficial enjoyment test would be the only means available for a decedent to have control over the ultimate disposition of property and yet for such property to qualify for the marital deduction. Such a provision would be a necessity where there are children involved or in situations of second marriages where the tax deferral opportunity under an unlimited marital deduction would encourage outright transfers of all property to surviving spouses.

While the adoption of a beneficial enjoyment rule would allow a decedent to qualify property for the marital deduction and still retain control over its ultimate disposition, it would appear that an unlimited marital deduction would still tend to encourage the transfer of all property to a surviving

spouse.

Position of other professional groups

In their studies for estate and gift tax reform, the U.S. Treasury Department, the American Law Institute and the American Bankers Association all propose liberalization of the current marital deduction, with respect to both amount of the deduction and the type of interest which will qualify.

The

Recommendations of the Treasury and of the ALI propose that the present 50 percent marital deduction be removed entirely and replaced by an unlimited 100 percent marital deduction. ABA favors a retention of the existing 50 percent marital deduction, coupled with a deduction for the first $250,000 of property transferred to the surviving spouse regardless of the 50 percent limitation.

With respect to the type of interest which will qualify for the marital deduction, the Treasury, the ALI, and the ABA, in general agree that the present terminable interest rule should be eliminated and replaced by a concept referred to as "current beneficial enjoyment rule," whereby a mere income interest to the surviving spouse may qualify for the marital deduction. Under the current beneficial enjoyment rule, an interest will qualify for the marital deduction whether or not the surviving spouse controls the underlying property, as long as it is agreed that the property will be taxed at the death of the spouse.

Proposals

Retention of the 50 percent marital deduction. The AICPA believes that the current incidence of gift and estate taxation imposes a disproportionate burden on small and medium-sized estates. The AICPA's unified transfer tax proposal recommends an exemption level of $150,000.

Assuming an exemption level of

$150,000, it is felt that a 50 percent marital deduction will

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estates.

Accordingly, the AICPA recommends a retention of

the 50 percent marital deduction as currently provided in

Sec. 2056.

Retention of the existing terminable interest rules. The AICPA also recommends a retention of the existing terminable interest rules. Advocates of change in the existing terminable interest rule point to the complex and technical requirements necessary for an interest other than outright ownership to qualify for the marital deduction. The existing terminable interest rule has resulted in an inequity for those unaware of its restrictive provisions. To replace such rule with a beneficial enjoyment theory would likewise cause inequity to the unwary. While a beneficial enjoyment rule would allow for greater flexibility in estate planning, introduction into the Code of an entirely new concept permitting a mere income interest to qualify for the marital deduction would add additional complexity to the law probably causing considerable new litiga

tion.

Summary

The AICPA is opposed to a change in the federal estate and gift tax laws which would permit an unlimited marital deduction and the addition of a beneficial enjoyment rule. While estate tax reform should provide adequate protection to a surviving spouse in moderate estates, the AICPA feels that the increase in the existing exemption level to $150,000 from $60,000, along with retention of the existing marital deduction and terminable

interest rules, will accomplish such a result. A change to an unlimited marital deduction and a beneficial enjoyment concept

would be of greater benefit to larger estates, resulting in

substantial revenue loss and adding further complexity to the existing tax laws.

Under current law, the federal estate tax is imposed upon the fair market value of assets includible in the decedent's gross estate determined at the date of death or alternate valuation date (after taking into account allowable deductions and credits). The basis of the property in the hands of the recipient beneficiaries then generally becomes its value for estate tax purposes. If, however, the property represents the right to "income in respect of a decedent"--such as wages receivable after death, or obligations derived from a sale reported by the decedent under the installment method--the beneficiary must carry over the decedent's basis, if any.

Asset appreciation is not subject to income tax, although it is included in the post-death basis of the asset, under the general rule stated above. Appreciated property transferred by inter vivos gift normally retains the same basis in the hands of the donee as it had in the hands of the donor, plus gift tax paid on the full value of the transfer.

The 1969 Treasury Proposals contended that the current law permits vast portions of capital gains to escape income It charged that the law fails to recognize the

taxation.

separate characters of estate and income taxation. It further