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June 21, 2011
Fixing the Federal Wealth Transfer Tax System

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By Bridget J. Crawford

Bridget J. Crawford is a professor at Pace University School of Law.

At the end of last year, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Act) was enacted to extend many of the Bush-era tax cuts. It also increased the estate and gift tax exemption to $5 million, lowered the rate to 35 percent, and implemented spousal portability for exemptions. However, it didn't address many of the substantial problems created by the Economic Growth and Tax Relief Reconciliation Act of 2001, originally scheduled to expire at the end of 2010. Instead, lawmakers merely kicked the can down the road and delayed the 2001 act's sunset until the end of 2012. This period of continued uncertainty makes planning for the future unnecessarily difficult and expensive. Crawford proposes making permanent the $5 million exemption, 35 percent tax rate, and spousal portability of the 2010 Tax Act, while remedying the problems and uncertainty created by the scheduled sunset of existing estate and gift tax rules on December 31, 2012.

Copyright 2011 Bridget J. Crawford.
All rights reserved.

According to the old chestnut attributed to Benjamin Franklin, nothing in life is certain other than death and taxes.1 For estate planners -- whose profession is concerned with the combination of the two -- quite the opposite is true. Uncertainty is the new normal. This period of uncertainty began with the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA),2 which was originally scheduled to expire at the end of 2010 but was then modified and extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Act),3 at least through the end of 2012. Congress might decide to do nothing. In that case, the pre-EGTRRA rules will spring back into effect. Alternately, Congress might decide to make permanent the changes under the 2010 Tax Act.

This article identifies aspects of EGTRRA and the 2010 Tax Act that Congress should retain without any scheduled expiration as part of a federal wealth tax system. The government and individuals will benefit from the enactment of wealth transfer tax laws that remain stable. If specific rules are made permanent (or at least not time-limited), people will be able to plan their estates without repeated consultations with attorneys and other estate planning professionals. Indeed, the only true beneficiaries of unstable legal frameworks are the estate planning professionals who can charge for services that respond to and anticipate tax law uncertainty.

A. Overview of Current Law

1. Rollback of estate tax repeal and a temporary $5 million exemption. The 2010 Tax Act reinstated the federal estate tax, otherwise in abeyance in 2010, retroactively to January 1, 2010. Any decedent dying in 2010, 2011, or 2012 has a $5 million estate tax exemption (the basic exclusion amount), adjusted for some lifetime transfers. For amounts above the basic exclusion amount, the maximum estate tax rate is 35 percent. It is a flat rate insofar as it applies to all amounts exceeding $5 million. Unless Congress acts, the estate tax exemption will revert on January 1, 2013, to $1 million, with a top rate of 55 percent.

During the year of estate tax repeal in 2010, EGTRRA introduced a modified carryover basis regime for property acquired from a decedent. Under section 1022, an executor could make an aggregate basis increase of $1.3 million (indexed) and an aggregate spousal property basis increase of $3 million (indexed). The 2010 Tax Act, enacted in December 2010, gave a decedent's executor the choice between the estate tax (with a $5 million exemption) or no estate tax (but the carryover basis regime contemplated by EGTRRA). That election presumably will be made by means of Form 8939, "Allocation of Increase in Basis for Property Acquired From a Decedent." Treasury and the IRS have not yet issued guidance or a deadline for filing Form 8939.4 Under EGTRRA as modified by the 2010 Tax Act, the estate tax will be restored in 2013 at 2001 levels. In other words, the estate tax exemption amount will revert to $1 million unless Congress takes action.

2. Portability. One of the 2010 Tax Act's most significant changes is that for 2011 and 2012 only, a married couple in effect may aggregate their basic exclusion amounts for gift and estate tax purposes. Thus, if a spouse who dies first has not applied his unused basic exclusion amount to lifetime transfers and does not have a sufficient level of wealth to require application of his entire unused exemption to death-time transfers, the surviving spouse may tack on to her own exemption the unused basic exclusion amount of the first spouse to die. The exclusion is therefore said to be portable from one spouse to another.

Portability is not automatic. The executor must elect on a timely filed estate tax return to allow the surviving spouse to use the decedent's unused basic exclusion amount. Elections are irrevocable,5 and the calculation of a deceased spouse's unused exclusion amount is always subject to recalculation by the IRS. In other words, the statute of limitation never runs.6

Without further action by Congress, portability will not survive beyond 2012. Instead, each individual will revert to having an applicable exclusion amount of $1 million, as provided by the pre-EGTRRA rules.

3. GSTT holiday, allocations, and severance. EGTRRA had previously repealed the generation-skipping transfer tax for 2010 only, creating a host of potential future problems for estate plans. The 2010 Tax Act then retroactively imposed the GSTT for all transfers in 2010, but it also made the effective GSTT rate zero and provided for a $5 million exemption for lifetime or death-time transfers in 2010. The GSTT exemption is not portable.

EGTRRA, as modified by the 2010 Tax Act, also created some administrative rules of convenience. A donor's GSTT exemption is automatically allocated to indirect skips or to transfers (other than direct transfers) to generation-skipping trusts. A trustee can make a qualified severance of a single trust and elect to treat the severed trust's multiple parts as separate trusts for GSTT purposes.

After December 31, 2012, the GSTT rules apply "as if the provisions and amendments" of EGTRRA "had never been enacted."7

4. Temporary reunification of gift and estate tax exemptions. The 2010 Tax Act leaves untouched EGTRRA's gift tax exemption of $1 million, even though it embraces a $5 million estate tax exemption for estates that do not elect modified carryover basis. Both the gift and estate tax exemptions are $5 million for 2011 and 2012 and are scheduled to revert to $1 million in 2013. The 2010 Tax Act also provides that for decedents dying in 2011 and 2012, for purposes of calculating the estate tax credit for gift tax paid on lifetime taxable gifts, one uses the tax rate in effect at the time of the decedent's death, regardless of the actual rate in effect at the time of the gift.

5. State estate tax credit. Between 2002 and 2005, EGTRRA gradually phased out the credit under section 2011 for state estate taxes. For decedents dying in 2005 and after, a deduction for state estate taxes (under section 2058) takes the place of the credit.

6. Extension of time to pay. Section 6166 provides for an extension to pay estate tax for some estates composed of interests in closely held businesses and having other specified characteristics. The estate can postpone payment for up to five years and then pay the tax over 10 years. To be eligible for this extension under section 6166, many complex tests must be satisfied. To state the important tests most broadly, the value of the estate's closely held business interests must be equal to 35 percent or more of the value of the gross estate. Generally speaking, the closely held business must be an active business, but the 2010 Tax Act has loosened that requirement to permit deferral for up to five years for some qualifying lending and finance businesses.

Section 6166 contains recapture and acceleration rules that apply if the business is disposed of within a specified period or if the estate fails to make the extended periodic payments of estate tax. Deferral comes with an interest obligation, albeit at a favorable rate.

The purpose of section 6166 is to allow estates composed mostly of nonliquid assets an extended time in which to pay estate tax. But because the provisions of section 6166 are complex, malleable, and nonobjective, an estate cannot be sure that it will qualify for the extension. That makes planning difficult.

7. Other administrative provisions. Under EGTRRA as modified by the 2010 Tax Act, the Treasury secretary has the authority to grant extensions for allocating the GSTT exemption, taking into account all the relevant circumstances, including evidence of the transferor's intent in the trust instrument. Also, the government will respect GSTT exemption allocations when the taxpayer can demonstrate substantial compliance with the appropriate statutes and regulations.

8. Conservation easements. Under EGTRRA as modified by the 2010 Tax Act, up to 40 percent or $500,000 of the value of some land subject to a qualified conservation easement may be excluded from the decedent's gross estate. If the easement reduces the property's value by less than 30 percent, the maximum excludable percentage is reduced.

EGTRRA expanded the definition of a qualified conservation easement by eliminating a pre-2001 requirement that the land be located within 25 miles of a metropolitan area or within 10 miles of a national park, wilderness area, or urban natural forest. Under EGTRRA, a qualified conservation easement may apply to any land located in the United States or a U.S. possession, as long as other criteria are met. Further, EGTRRA provided that the determination of a particular easement's status as a qualified conservation easement is made on the date the property is donated to a qualified charity. The 2010 Tax Act has extended EGTRRA's sunset -- scheduled for 2009 -- to the end of 2012.

9. Regulated investment company stock. Under EGTRRA as modified by the 2010 Tax Act, a percentage of a nonresident noncitizen's stock in a regulated investment company is treated as property not situated in the United States under section 2015(d)(3). Thus, that stock is not included in the nonresident noncitizen's gross estate for U.S. estate tax purposes. Under EGTRRA as modified by the 2010 Tax Act, the percentage of stock eligible for this treatment is the proportion of assets held by the RIC that were debt obligations, deposits, or other property that would be treated as situated outside the United States if they were held directly by the estate. This estate tax look-through rule is scheduled to sunset at the end of 2011.

B. Problems With Current Law

1. Modified carryover basis and the $5 million exemption. The temporary repeal of estate taxation in 2010, followed by a temporary, two-year restoration with a $5 million exemption, extends the uncertainty and challenges potential transferors have faced since 2001. A climate of uncertainty makes planning difficult and requires people of even moderate means to spend more (and more frequently) to keep their estate plans up to date. Another problem created by repeal/reinstatement is horizontal equity. An estate and its beneficiaries might experience different tax burdens depending solely on the time of the decedent's date of death.

Consider, for example, the estate of an unmarried decedent having $5 million or less. If the decedent were to die in 2010 and the executor does not elect into the estate tax regime, the decedent's beneficiaries may face significant capital gains on the sale of appreciated property acquired from the decedent if the aggregate basis increase of $1.3 million is not enough to cover the assets. Only the beneficiaries of an estate with $1.3 million or less will avoid subsequent income taxation. If an unmarried decedent having more than $1.3 million but $5 million or less were to die in 2011, the estate would not be subject to any estate tax, and the beneficiaries' income tax basis in property received from the decedent would be its fair market value on the decedent's date of death or the alternate valuation date. Because the basis of appreciated property gets stepped up to this estate tax value, the beneficiaries will not realize gain on the subsequent sale of those assets. But if the unmarried decedent died two years later -- on January 1, 2013 -- the estate would face taxation at a rate of 55 percent on amounts exceeding $1 million.

Married couples with a combined $10 million or less in assets face an equally uncertain tax result, depending on the year of the death of the first spouse to die. If the first death occurred in 2010, for example, and the executor did not elect into the estate tax regime, the decedent's beneficiaries may face significant capital gains on the sale of appreciated property acquired from the decedent. Even if the estate passes 100 percent to the surviving spouse, if the value of the estate of the first spouse to die is greater than $3 million, there will not be enough spousal basis increase to step up the basis of all the assets passing to the survivor. The survivor then will owe income tax on the subsequent sale of any appreciated assets acquired from the decedent.

Contrast the result for that married couple with the result for a couple when the first spouse dies in 2011, when the estate tax exemption is $5 million. The executor of the estate of the first spouse to die can elect irrevocably to allow the surviving spouse to use for estate and gift tax purposes any of the exclusion amount that was unused by the first spouse to die. Thus, for example, if the first spouse dies with an estate worth $4 million and leaves everything to the surviving spouse, there will be no estate tax due on the death of the first spouse, because the transfers qualify for the estate tax marital deduction. On the subsequent death of the surviving spouse, the survivor's estate will have a $10 million exclusion amount ($5 million ported from the estate of the first spouse to die to the estate of the second spouse to die). Yet, if the first spouse died in 2013 with an estate worth $4 million, her exemption is wasted unless she allocates her $1 million exclusion to transfers other than marital or charitable ones. On the subsequent death of the surviving spouse, the survivor's estate will have only his $1 million exemption to allocate to transfers if it is not otherwise allocated during his lifetime.

Carryover basis rules require precise record keeping that may be difficult or impossible for many decedents' executors. This is especially true for assets that have been held for a long period, and information about the acquisition costs or improvements may not have been maintained (because the law at the time did not so require). Further, section 1022(b)(2)(C) calls for a complex adjustment to basis for the decedent's capital loss carryovers, a determination that necessarily involves multiple tax years and a variety of factors. Making sound decisions about the allocation of spousal basis increase or aggregate basis increase requires confirmation that the prior loss deductions were correctly taken. In many cases the necessary records simply may be unavailable.

2. Portability. Individuated applicable exclusion amounts, such as a $1 million exemption from estate and gift taxes, leads to unnecessary complexity in estate planning. To take full advantage of the exemption, each spouse must have in his own name a sufficient amount of assets to which the exclusion can be allocated. Some assets, like qualified retirement plans, however, can never be used to fund a credit shelter trust. Thus, one spouse may need to make lifetime transfers to the other to ensure that each will be able to take full advantage of the applicable exemption. But making the estate and gift tax exemption permanently portable is only a partial solution. The GSTT exemption must be made portable, too, or people will continue to need the so-called A/B estate plan, consisting of a credit shelter trust or a marital deduction trust that can qualify for the reverse qualified terminable interest property election. It is true that under current law a transferor's spouse may make use of the transferor's applicable exclusion and GSTT exemption, but only if the couple agrees to gift-split via a timely filed gift tax return.8 Thus, unless the GSTT exemption becomes portable along with the gift and estate tax exemption, spouses will have to continue making tax-motivated transfers between themselves and engage in complex estate planning that serves no meaningful purpose other than tax minimization.

3. GSTT uncertainty. The sunset provisions of EGTRRA raised questions of construction. Before enactment of the 2010 Tax Act, for example, section 2664 provided that chapter 13 (the GSTT rules) did not apply to generation-skipping transfers after 2009. But because chapter 13 contains the definition of generation-skipping transfer, presumably the definition itself was to remain in effect after 2009. Luckily, this and similar construction problems were solved with the retroactive enactment of the GSTT with an effective rate of zero for transfers in 2010.

The 2010 Tax Act's retroactive enactment of the GSTT did not solve all the problems created by EGTRRA's temporary repeal, however. For example, consider that many pre-EGTRRA wills and revocable trusts may use a formula clause for funding trusts for grandchildren or remote descendants. A will might define the amount passing to a trust as the amount that would qualify for the federal GSTT exemption. In 2010, 2011, and 2012, that amount is $5 million (adjusted for inflation in 2011). In 2011 the exemption reverts to $1 million (adjusted for inflation). The difference between a $5 million gift and a $1 million gift likely is a material difference in the estate plans of most transferors, but the change in level of trust funding would occur because of the "accident" of death in one year versus another, not because the transferor actually changed his mind about the amount of the gift.

A second problem created by the retroactive imposition of the GSTT, albeit at a zero rate, is the creation of a tax-motivated incentive to have made in 2010 transfers that might otherwise have been postponed to future years. Given the choice between making a GSTT-free transfer in 2010 or making the same transfer in 2011 and either using or exceeding the GSTT exemption, the transferor would choose to make the transfer in 2010. The tax law thus has a distorting effect on transferors' behavior.

Third, it is unclear whether the $5 million GSTT exemption is available to the estate if the executor elected in 2010 to be subject to the carryover basis regime instead of the estate tax. The Joint Committee on Taxation has said that it is,9 and these statements usually are reliable, but there does not appear to be language in the code itself or the 2010 Tax Act that supports that position.

Fourth, except for outright direct skip transfers, the GSTT annual exclusion is not coordinated with the gift tax annual exclusion. The availability of some elections for GSTT purposes but not for estate and gift tax purposes causes GSTT planning to be excessively complicated, and it unnecessarily exaggerates the differences among the three wealth transfer tax systems.10 To illustrate, consider that more transfers in trust will qualify for the gift tax annual exclusion under section 2503(b) than the GSTT exclusion under section 2642(c). Take, for example, a transferor who creates and funds a trust for the benefit of a grandchild, with the grandchild having the right to withdraw property transferred to the trust, which otherwise complies with all the requirements of section 2503(b). For gift tax purposes, because of Crummey withdrawal rights, the transfer is deemed to be a direct transfer to the grandchild, and the transfer qualifies for the gift tax annual exclusion. For GSTT purposes, however, the transfer is deemed to be made to the trust itself, and the transfer does not qualify for the GSTT exclusion under section 2642(c) unless the trust itself is a skip person (meaning that during the life of the grandchild-beneficiary, no portion of the trust income or principal may be paid or distributed to or for the benefit of anyone other than her, and the trust assets must be includable in her gross federal estate if the trust does not terminate before her death). Thus, the same transfer that qualifies for the gift tax annual exclusion may not qualify for the estate tax annual exclusion.

A fifth problem created by the current system is the uncertain impact on estate tax inclusion periods of an executor's election into the modified carryover basis regime in 2010. Under section 2642(f)(3), an estate tax inclusion period ends on the earliest of (1) the date on which the value of the transferred property would not be included in the transferor's gross estate for federal estate tax purposes if the transferor died, (2) the date on which there is a generation-skipping transfer of that property, or (3) the date of the transferor's death. If an executor elected for a decedent to be subject to the carryover basis rules, by definition there is no federal estate tax imposed on the value of that decedent's estate. Thus, presumably all estate tax inclusion periods for trusts of which that decedent is the transferor terminate on the date of the transferor's death in 2010. Those trusts arguably are free from GSTT, even if the decedent did not previously allocate any GSTT exemption to the transfer. Yet, the result is far from certain absent clarification by Congress.

Sixth, the retroactive enactment of a GSTT with a zero rate for generation-skipping transfers in 2010 raises the possibility that all transfers in trust that year have a zero inclusion ratio. If so, the trust would be forever free of GSTT on subsequent taxable distributions and terminations. Generally, one determines the applicable rate of taxation for GSTT purposes by multiplying the highest estate tax rate by the trust's inclusion ratio. If the maximum estate tax rate in 2010 was 35 percent, because the decedent's executors did not elect into carryover basis, the inclusion rate must be zero to arrive at a zero rate of taxation for GSTT purposes. If the executors did elect into carryover basis, the highest estate tax rate would be zero, and regardless of the trust's inclusion ratio, the applicable rate would be zero. But did Congress intend for a trust to have a zero inclusion ratio absent an allocation of GSTT exemption to the trust? All we know is that the GSTT rate for 2010 was zero. A trustee who is considering making distributions from a trust with a possibly zero inclusion ratio is faced with an uncertain tax result.

Seventh, the sunset provisions of EGTRRA, as modified by the 2010 Tax Act, provide that the tax laws are to be applied as if the provisions and amendments of EGTRRA and the 2010 Tax Act had never been enacted.11 Simply reinstating the GSTT as it was pre-EGTRRA sounds simple, but it is not. It is unclear, for example, whether a trust created in 2010 with an inclusion ratio of zero will retain that inclusion ratio after 2012. Also, if the GSTT regime is to apply as if the provisions and amendments of EGTRRA and the 2010 Tax Act had never been enacted, it is not clear that the automatic allocation of GSTT exemption will be respected. Thus, in 2013 transferors may need to make late allocations to transfers that they made more than 10 years earlier. Typically, late allocations are made based on the value of the property at the time of the late allocation. That means that transferors will be forced to allocate more GSTT exemption to appreciated property than they would have allocated at the time of the initial transfer had the GSTT been in effect at 2013 rates. If the transfers were substantial enough, the transferor might not have enough GSTT exemption to cover transfers that were GSTT-free in 2011 or 2012, for example.

Finally, if in 2013 the GSTT laws are to apply as if EGTRRA and the 2010 Tax Act had never been enacted, qualified severances for GSTT purposes might not be respected. That would force the recalculation of a reunified trust's inclusion ratio and upset whatever planning the transferor had undertaken in reliance on the law in effect at the time.

4. Temporary reunification of gift and estate tax exemptions. When the gift and estate tax exemptions are decoupled with a lower gift tax exemption, transferors who otherwise would be motivated to make lifetime transfers have an incentive to make death-time transfers instead. The transferor will make lifetime gifts only when the benefits of doing so are outweighed by the gift tax cost of making gifts in excess of the applicable exclusion amount.

5. State estate tax credit. The seemingly minor change from a state estate tax credit under section 2011 to a deduction under section 2058 had a significant and immediate economic impact in states that determined the amount of a decedent's state estate taxes by reference to the federal estate tax credit under section 2011 -- so-called pickup state estate taxes. In the absence of the state estate tax credit, some states have enacted separate estate taxes. Other states are constitutionally prohibited from doing so. State estate tax systems vary from state to state, and the nonuniformity of those laws can lead to costly litigation over domicile when an executor treats a decedent as a domiciliary of one state but a second state claims the decedent was domiciled within its borders. Further, because the estate tax applicable exclusion set by a given state may be lower (or higher) than the federal estate tax applicable exclusion, a decedent's estate can have no federal estate tax liability but still owe state estate taxes (or vice versa).

Uncoupled state and federal estate taxes can operate as Scylla and Charybdis on a decedent's will that uses formula funding clauses. If a will directs that a credit shelter trust be funded with an amount equal to the decedent's unused federal applicable exclusion, the estate might owe state estate taxes in jurisdictions where the state estate tax applicable exclusion is lower than its federal counterpart. The executor might have the option of funding the credit shelter trust with an amount equal to the lesser of the state or federal estate tax credit, but that would require a larger marital bequest (and greater estate tax inclusion on the death of the second spouse to die, if the assets are not consumed during the surviving spouse's lifetime). For estates in which the executor elects into the carryover basis regime, such a formula clause may result in a credit shelter trust of zero, which may or may not be tax advantageous for the decedent's beneficiaries.

6. Extension of time to pay. The rules of section 6166 are simply too complicated and unpredictable in application for a potential transferor to rely with any certainty on the section's availability in a particular case. Even if the executor believes the estate will likely qualify for the deferral, the estate may owe significant penalties if the IRS later succeeds in challenging the election. Further, it is not clear that the nonliquidity assumptions underlying the section are actually true. Many closely held businesses, especially financial ones, are susceptible to at least partial liquidation with reasonable notice. Finally, transferors who engage in careful planning might be able to make last-minute transfers or investments for no other reason other than to try to qualify for deferral under section 6166.

7. Other administrative provisions. Extensions of time for GSTT exemption allocation and a substantial compliance rule are sensible responses to the legal uncertainty and complexity created by EGTRRA as modified by the 2010 Tax Act.

8. Conservation easements. The extension of qualified conservation easement status to any property located in the United States, regardless of its distance from a metropolitan area, will encourage the commitment of land for conservation purposes and is thus a salutary modification.

9. RIC stock. Making permanent the estate tax look-through rule for stock in a RIC owned by a decedent who was a nonresident and noncitizen is consistent with a substance-over-form approach to estate taxation.

C. Proposal for Reform

Congress should smooth out differences in the gift tax, estate tax, and GSTT systems, make permanent a $5 million exemption and portability, and provide guidance on complex GSTT questions that have arisen during the phaseout or repeal periods of EGTRRA or the 2010 Tax Act.

1. Reinstate the estate tax with a $5 million exemption and a top rate of 35 percent. Congress should make permanent the $5 million estate tax exemption and the maximum rate of 35 percent. Doing so would eliminate uncertainty and the associated costs of planning in an unstable tax climate. Making the $5 million estate tax exemption permanent will allow people to plan for the future. Allowing the estate tax exemption to revert to $1 million (the pre-EGTRRA level) will cause married couples with more than $2 million in aggregate assets to incur significant time and expense in planning their estates and subject them to taxation at a lower level of wealth than any other married couple in the last 10 years.

2. Make portability permanent and further applicable to GSTT exemption. Making portability permanent and extending portability to the GSTT exemption will simplify estate planning for most married couples.

3. Make the GSTT exemption permanent and portable; clarify uncertainty under the transition rules. If Congress makes permanent a portable $5 million estate tax exemption, it should make permanent a portable $5 million GSTT exemption as well. Congress also should:

    a. Make clear that the $5 million GSTT exemption is available to the estate if the executor elected in 2010 to be subject to the carryover basis regime instead of the estate tax.

    b. Coordinate the GSTT annual exclusion with the gift tax annual exclusion. This could be accomplished in one of two ways. Congress could deny annual exclusions and GSTT exclusions for all transfers in trust, except for transfers to minority trusts under section 2503(c). Alternately, Congress could permit transfers in trust to qualify for both the gift tax annual exclusion and the GSTT exclusion if the beneficiary has an appropriately drafted withdrawal right.

    c. Clarify that in the case of decedents who died in 2010, if the executor elected carryover basis, then the estate tax inclusion period for any trust of which the decedent is the transferor ended on the date of the decedent's death.

    d. Make plain that a trust created and funded in 2010 will retain an inclusion ratio of zero if no additions are made to the trust and that future distributions from such a trust or the termination of a trust will therefore not trigger any GSTT liability.

    e. Expressly provide that automatic allocation of GSTT exemption and GSTT-motivated trust severances will be respected for all future GSTT purposes.

4. Make permanent a unified gift and estate tax exemption. If Congress makes permanent a portable $5 million estate tax exemption, it should make permanent a portable $5 million gift tax exemption as well.

5. Restore the state estate tax credit. Congress should restore the state estate tax credit as it existed before the enactment of EGTRRA. This would minimize tax-motivated litigation over a decedent's domicile and eliminate uncertainty and difficult decisions about the funding of formula-driven bequests when the state and federal estate tax exemptions are not coextensive.

6. Allow advance payments of estate tax on closely held business assets. Congress should permit taxpayers to prepay the estate tax in cases in which it is reasonably anticipated that the estate will be composed of a specific percentage of closely held business assets. For valuation purposes, the amount of the tax would be determined by reference to the value of the business interests as of the date of payment, and the taxpayer's account would receive interest at a statutory rate from the time of prepayment to the taxpayer's subsequent death. In return for an advance payment of estate taxes, the taxpayer would be able to freeze the assets' value for estate tax purposes. This is a reasonable revenue trade-off.

7. Make some administrative flexibility permanent. Congress should make permanent the Treasury secretary's administrative flexibility to grant extensions of time for allocating the GSTT exemption and to allow GSTT exemption allocations that substantially comply with the appropriate statutes and regulations. This is an appropriate (and humane) response to an overly complicated law.

8. Make permanent the broader definition of qualified conservation easements. Congress should make permanent EGTRRA's changes to the definition of a qualified conservation easement, extended through 2012 by the 2010 Tax Act.

9. Make permanent the estate tax look-through rule for some RIC stock. Congress should make permanent EGTRRA's changes to section 2015(d)(3), as amended by the 2010 Tax Act.

D. Conclusion

Tax planning is an expected -- if not certain -- aspect of life for most individuals with any level of accumulated assets. It is reasonable to expect that individuals will have to change their estate plans and consult with their advisers as laws change. But a constantly changing and unstable wealth transfer tax system is economically wasteful and contributes to a sense that the balance of power between taxpayers and the government is tipped too far in favor of the government. EGTRRA, as modified by the 2010 Tax Act, implemented several temporary measures that enhance the fairness of the wealth transfer tax system. Congress should make permanent a $5 million unified gift tax, estate tax, and GSTT exemption that is fully portable between spouses, fix the top rate at 35 percent, and resolve questions raised by the transition rules.


1 Letter from Benjamin Franklin to Jean-Baptiste Leroy (Nov. 13, 1789), in John Bartlett, Familiar Quotations 310 (16th ed. 1992) (1855) ("Our Constitution is in actual operation. Everything appears to promise that it will last; but in this world nothing is certain but death and taxes.").

2 P.L. 107-16.

3 P.L. 111-312 (signed into law by President Obama on Dec. 17, 2010).

4 See IR-2011-33, Doc 2011-6819, 2011 TNT 63-15.

5 Section 2010(c)(5)(A).

6 Section 2010(c)(5)(B).

7 EGTRRA section 901(b), as amended by the 2010 Tax Act.

8 Sections 2513 and 2652(a).

9 JCT, "Technical Explanation of the Revenue Provisions Contained in the 'Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010' Scheduled for Consideration by the United States Senate," JCX-55-10 (Dec. 10, 2010), at 50, n.53, Doc 2010-26496, 2010 TNT 238-74.

10 See JCT, "General Explanation of the Tax Reform Act of 1986," JCS-10-87 (May 4, 1987), at 1263 (The purpose of federal wealth transfer taxes is "not only to raise revenue, but also to do so in a manner that has as nearly as possible a uniform effect. This policy is best served when transfer tax consequences do not vary widely depending on whether property is transferred outright to immediately succeeding generations or is transferred in ways that skip generations.").

11 EGTRRA section 901(b).


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