Credit Amount Increases; Related Simplification Measures. A meaningful increase in the applicable credit amount would remove a significant number of taxpayers from the transfer tax system. Much attention has been focused on specific provisions designed to alleviate the impact of the gift and estate tax on specific groups, such as the owners of family farms, ranches and businesses. As a result of that attention, specific relief has been enacted to assist those affected individuals. However, despite the best intentions of these provisions, qualification for and compliance with them are onerous, and in many cases business decisions are driven purely by planning for a tax result instead of being based on sound economics. A truly meaningful increase in the applicable credit amount would remove a number of taxpayers from the system who otherwise might find it necessary to seek to comply with complex and restrictive planning provisions. It would also allow the repeal of those special interest relief provisions (for example, sections 2032A and 2057) whose maximum benefit would then be less than the increased applicable exemption amount.
Valuation Discounts. Appraisals to determine and substantiate valuation discounts of partial interests are heavily fact-driven, and are expensive, yet they provide no guarantees of finality in the transfer tax arena. Litigation concerning these discounts has generally become a battle between the experts (appraisers). These disputes (and efforts to avoid them) have become very costly for both taxpayers and the Internal Revenue Service (in terms of the administrative resources required to be devoted to them). One response could be to allow a safe harbor valuation discount for all partial interests in unmarketable entities – whether representing a minority or controlling interest in the entity. This discount could be applied to the value of the assets of the entity (like a holding company), without any additional discounts for interests in other entities. (For example, if an LLC owned a 30% interest in a partnership, 30% of the value of the partnership’s assets would be added to the value of the LLC’s other assets, and then the safe harbor discount would be applied to the LLC’s assets.) This discount would be an elective safe harbor – no appraisal of the interest would be required to substantiate the discount, and the discount would not be subject to challenge on audit. If a taxpayer instead should elect to claim a more substantial discount based on the particular facts, then current rules and procedures would apply.
Present Interest Rule. The “present interest rule” applicable to the annual $10,000 gift exclusion is a source of estate planning complexity (including for persons without large estates) and tax disputes. As an alternative, donors could be allowed a limited number of, or total dollar amount of, annual exclusions under a revised rule that would allow the exclusion to apply to gifts of future interests.
Section 6166. Section 6166 could be modified to provide availability of deferred tax payments based on the amount of nonliquid assets in an estate, rather than focusing on the highly detailed “family business” rules of current law. Under current law, in order to be sure that an estate will meet the percentage test to qualify for tax deferral under section 6166, taxpayers may forgo the opportunity to transfer or sell business interests and/or other assets during life, even when there are sound economic and other reasons for doing so. Similarly, since certain assets will not qualify for this tax deferral, otherwise beneficial and commercially prudent decisions concerning the structure of business entities are often not made in order to be sure that tax deferral will be available on death. In addition, a significant portion of the litigation and disputes on audit of estate tax returns concern whether or not an estate qualifies for this tax deferral. The availability and administration of section 6166 can be the cause of significant audit and litigation time and expense.
Unified Credit Portability Between Spouses. The unused applicable exclusion amount and GST tax exemption amount of the first spouse to die could be deemed to be transferred to and usable by the surviving spouse. If this provision were enacted, it might also be worthwhile to consider changing the current unified credit into a deduction, in order to preserve similar progressive rate structures for couples regardless of their division of property holdings and types of property transfers included in their wills. This proposal would greatly simplify estate planning for married couples by reducing the complexity of pre-death planning and the cost associated with trust administration. It would eliminate the need for the division and reallocation of assets between spouses solely for tax purposes. In addition, it is consistent with one of the underlying goals of the unlimited marital deduction to treat spouses in common law and community property jurisdictions in a similar fashion.
Statute of Limitations. There are separate statutes of limitations applicable to the estate tax, the gift tax, and the generation-skipping transfer tax. A global statute applicable to all three taxes would reduce the complexity of estate administration and provide finality to transfer tax issues after passage of an appropriate period of time.
