"April 5, 2010
The Honorable Sander M. Levin
Chairman
United States House of Representatives
Committee on Ways & Means
1102 Longworth House Office Building
Washington, DC 20515
The Honorable Max S. Baucus
Chairman
United States Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510-6200
The Honorable Dave Camp
Ranking Member
United States House of Representatives
Committee on Ways & Means
1102 Longworth House Office Building
Washington, DC 20515
The Honorable Charles E. Grassley
Ranking Member
United States Senate
Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510-6200
Re: Reform of Federal Wealth Transfer Tax
Dear Chairmen and Ranking Members:
On behalf of the American Bar Association Section of
Taxation, this letter emphasizes and comments on the pressing need for Congress
to address the unusual status of the federal estate and generation-skipping
transfer ("GST") taxes in 2010 and 2011. This letter has not been
approved by the House of Delegates or the Board of Governors of the American
Bar Association and should not be construed as representing the position of the
American Bar Association.
This letter amplifies the July 14, 2009, Statement of
Policy Regarding Reform of Federal Wealth Transfer Tax submitted by the Section
of Taxation and the Section of Real Property, Trust and Estate Law of the
American Bar Association, n1 which built
on the 2004 report of a task force comprised of representatives from those
Sections, the American College of Tax Counsel, the American College of Trust
and Estate Counsel, the American Bankers Association, and the American Institute
of Certified Public Accountants. n2
Summary
Under the Economic Growth and Tax Relief Reconciliation
Act of 2001 ("EGTRRA"), n3 the
federal estate and GST taxes are suspended for 2010 and restored in 2011, while
the gift tax is imposed at a lower 35% rate in 2010. This creates dilemmas in
the interpretation and administration of the tax law that are uncommonly
difficult, because, unlike most income tax changes, (i) it is a suspension of
two entire tax systems, not just a temporary change in the rules affecting
those tax systems, and (ii) it affects taxes that are applied on a continuous
basis not tied to transactions or calendar years. Therefore, we believe it is
important that the federal estate and GST taxes receive prompt congressional
attention and that Congress be sensitive to the distinctive nature of transfer
(estate, gift, and GST) taxes.
Identification of Issues
Estate planning is necessarily done on a long-term, often
life-long, basis. Transfer taxes generally are computed on a cumulative basis
and are not oriented to calendar years. The gift tax return is an annual
return, when needed, but the gift tax is calculated with reference to all gifts
since 1932, and the estate tax is calculated with reference to the decedent's estate
plus all gifts since 1977. By its nature, the GST tax has an even longer
temporal range over which actions create tax consequences in the future,
sometimes the distant future.
Because of the inability to predict either the time of a
person's death or other critical events, or what the tax law will be at the time
death or another critical event occurs, estate planning involves a widespread
use of formulas to define dispositions with different tax attributes by
reference to exemptions, credits, and other tax terms in effect at the time.
Even when the focus is to achieve a non-tax objective such as making equitable
distributions among beneficiaries or defining the rights and expectations of
parties to a premarital agreement, widely understood objective measures such as
"gross estate," "adjusted gross estate," and "taxable
estate" are often used.
Under sections 2210(a) and 2664, n4 added by EGTRRA, the estate and GST tax
chapters "shall not apply" in 2010. These provisions of EGGTRA do not
simply change rates, exemptions, credits, or substantive rules for defining the
tax base. They suspend two entire tax systems that have been relied on for
decades both to shape long-term estate plans and to provide clear tax results
over a long temporal continuum.
Although basis and gain are by themselves not new
concepts, the institution for one year of a carryover basis regime to replace
the estate tax in 2010 is a challenge. Without technical corrections,
regulations, other guidance, forms, instructions, or any of the other implementing
measures common to most legislative initiatives, carryover basis is not well understood.
The carryover basis regime will apply to more taxpayers than the most recent
estate tax did. The pressure that the carryover basis regime creates,
especially on married couples, to structure estate dispositions around unrealized
appreciation rather than value has proved to be a much more vexing paradigm
shift than many estate planners realized when EGTRRA was enacted in 2001.
Most persons are not affected by estate, gift, and GST
taxes. The simple disposition of estates under wills or laws of intestate
succession, all to a spouse or children or in a similar manner, works well in
most of those cases. But for many of the taxpayers who are subject to estate
tax, planning in 2010 has either stopped because no one knows what to do, or is
proceeding frantically to cover all possible outcomes in an environment in
which no one knows what works. With 2010 now entering its second quarter, the
latter category seems to be growing. The possibility that Congress may reinstate
and change the estate and GST taxes retroactively increases the difficulty of
making an effective plan.
The dilemmas are not limited to 2010. In 2011, when the
estate and GST taxes are scheduled to return, the interpretation and effect of
these taxes will continue to be unclear, especially in the case of the GST tax.
Because the estate and GST taxes are oriented to a long-term continuum, not to
distinct calendar years, the blanket mandate of section 901(b) of EGTRRA
that the Code "shall be applied and administered to years, estates, gifts,
and transfers [after December 31, 2010,] as if the provisions and amendments
[of EGTRRA] had never been enacted" will be impossible to apply with
confidence.
Examples
The following examples illustrate some of the current
dilemmas.
1. The executor (or trustee) of someone who has died in
2010 does not know if the estate will face a federal estate tax obligation,
does not know the income tax consequences if assets are sold to meet whatever
the estate's obligations are, and may not even know who the beneficiaries of
the estate are (if the disposition of the estate is governed by formulas that
rely on tax concepts). In light of the executor's fiduciary duty to be prudent
and impartial, these uncertainties create extraordinary pressures on the
executor and hardship and exasperation for beneficiaries. Executors by and
large try to do a conscientious job consistent with their fiduciary duties.
Executors generally do not try to take advantage of the tax rules or the
uncertainty about those rules. As a result, executors arguably are the most
sympathetic group in need of relief. In contrast, it would be understandable if
Congress did not provide as much relief to individuals who may have taken
opportunistic inter vivos actions in 2010.
2. Someone who is sick or otherwise may be at an elevated
risk of dying during 2010 does not know how to update estate planning documents
to produce reasonable dispositive and tax results. This dilemma faces anyone
who tries to plan for all contingencies and has already prompted a considerable
amount of elaborate and wasteful drafting, but this dilemma is especially acute
for the very elderly or frail.
3. Someone who tries to provide for alternative
dispositions contingent on what the applicable law turns out to be is concerned
about the uncertain timing and effective date of congressional action and about
the possibility that any retroactive change in the law would be subject to a
constitutional challenge that might take several years to resolve, potentially
leaving the estate plan in a state of suspense.
4. Someone who is contemplating making a gift in 2010
does not know what rules might apply to the gift. The uncertainty is much
broader than just the possibility that Congress might retroactively change the
current 35% gift tax rate back to 45%. If the gift is in trust, as gifts often
are, it is impossible to tell what the long-term GST tax treatment of the trust
will be. These issues arise even in the case of continuing payments that cannot
conveniently be avoided or deferred, such as additions to a life insurance
trust to permit the trust to pay life insurance premiums.
Generally, the longer we go into 2010, the more
problematic these situations become, especially for fiduciaries who need to
make prudent investment decisions and are under increasing and understandable
pressure from anxious beneficiaries.
Other Issues
There are a number of miscellaneous tax issues that we
also believe merit consideration including the income tax exemption of
testamentary charitable remainder trusts in the absence of an estate tax
deduction, n5 the gift tax treatment of
inter vivos charitable remainder trusts and other trusts, n6 and the basis of property received from a
decedent dying in 2010 if the property is sold after 2010 when the carryover
basis rules no longer apply.
Related transfer tax initiatives that have recently
received attention include indexing the applicable exemptions for inflation,
making those exemptions portable between spouses, and reunifying the estate and
gift tax exemptions. Those initiatives are important, and are discussed, along
with other potential reforms, in the July 14, 2009, Statement of Policy
Regarding Reform of Federal Wealth Transfer Tax, but we believe the priority
still should be the restoration of clarity to current law.
Finally, we also urge consideration of other provisions
of Title V of EGTRRA that "sunset" in 2011. These provisions relate
to conservation easements, n7 the
allocation and effect of GST exemption,
n8 and the extension of time to pay estate tax under section 6166. n9 Unless Congress identifies a policy reason
not to do so, we suggest that these provisions be made permanent.
We appreciate your consideration of these comments.
Representatives of the Section would be pleased to discuss this letter with you
or your respective staffs. Please contact Helen Hubbard, the Section's Vice
Chair for Government Relations, at (202) 452-7005 begin_of_the_skype_highlighting (202) 452-7005 end_of_the_skype_highlighting if that would be helpful.
Sincerely,
Stuart M.
Lewis
Chair, ABA
Section of Taxation
Washington, D.C.
cc:
Honorable Timothy F. Geithner, Secretary, Department of
the Treasury
Honorable Douglas H. Shulman, Commissioner, Internal
Revenue Service
Honorable Michael F. Mundaca, Assistant Secretary (Tax
Policy),
Department of the Treasury
Mr. John L. Buckley, Majority Chief Tax Counsel,
House Ways and Means Committee
Mr. Russell Sullivan, Majority Staff Director,
Senate Finance Committee
Mr. Jon Traub, Minority Staff Director, House Ways and
Means
Committee
Mr. Kolan Davis, Minority Staff Director, Senate Finance
Committee
Mr. Thomas A. Barthold, Chief of Staff, Joint Committee
on Taxation
FOOTNOTES:
n1
Available
at
http://www.abanet.org/tax/pubpolicy/2009/090714abasectaxandrealproptrustlawstatementofpolregardingreformoffederalwealthtransfertax.pdf.
n2
58 TAX LAW. 93 (Fall 2004); also available
at http://www.abanet.org/rppt/section_info/tttf/home.html.
n3
Pub. Law No. 107-16, 115 Stat. 38 (2001).
n4
References to a "section" are to a
section of the Internal Revenue Code of 1986, as amended (the
"Code"), unless otherwise indicated.
n5
Reg. section 1.664-1(a)(1)(iii)(a).
n6
I.R.C. section 2511(c).
n7
EGTRRA section 551.
n8
EGTRRA section 561, 562, 563, 564.
n9
EGTRRA section 571, 572."
Posted by Neil I. Rumbak, Associate Editor, Wealth Strategies Journal.
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