1976, November, Pg. 1661. Tax Tips.

5 Colo.Law. 1661

Colorado Lawyer

1976.

1976, November, Pg. 1661.

Tax Tips

1661Vol. 5, No. 9, Pg. 1661Tax TipsESTATE AND GIFT PLANNING UNDER THE 1976 TAX REFORM ACT

The following attempts to highlight some of the more significant changes effected by the estate and gift tax provisions of the Tax Reform Act of 1976 ("TRA," the "Act"), with a view to pre-effective date (generally 12/31/76) planning possibilities.

New ResponsibilitiesThe first significant change effected by the Act is to exact of us all a determined commitment to self-education (financed, of course, as well as initiated and administered).

Secondly, it imposes upon us an ethical and legal obligation to advise our clients (at least those for whom we have previously done estate planning) of its passage and impact upon them.

Thirdly, of course, there is much updating of documents to be done.

Effective DateAlthough there are transitional rule exceptions, the provisions of the Act amending the estate and gift tax law are generally applicable to inter vivos transfers made after 12/31/76, and to estates of decedents dying after that date.

Unified Transfer ConceptThe TRA's capstone is the concept of unified lifetime and deathtime transfers. It replaces the present dual structure of separate gift and estate taxes, together with separate rate schedules and exemptions, with a unified rate schedule and credit for all transfers, whether inter vivos or at death.

In place of the $60,000 estate tax exemption and $30,000 lifetime gift tax exemption, ultimately there will now be a single $47,000 credit, to be phased in as follows:

YearCreditEquivalent Exemption1977 $30,000 $120,6661978 $34,000 $134,0001979 $38,000 $147,3331980 $42,500 $161,5631981 $47,000 $175,625The unified rate structure emasculates lifetime transfers of much of their former tax-saving advantage. For openers, the unified rate structure will run from a minimum of 18 percent to a maximum of 70 percent. Under present law, the estate tax rates range from 3 to 77 percent, while, significantly, the gift tax rates range from 2 1/4 to 57 3/4 percent (approximately 1662 75 percent of the present estate tax rates). Moreover, under the new rate structure, because of the operative effect of the credit, the lowest effective transfer rate will be 30 percent.

Gone are the days when lifetime transfers had the additional advantage of moving assets from the highest estate tax brackets into the lowest gift tax brackets. It will now cost the same to make a transfer during life as at death.

Finally, with the amendment to the "contemplation of death" rule (no longer a rebuttable presumption, but conclusive that gifts made within three years prior to the date of death are "in contemplation of death"), gifts are no longer "nothing-to-lose propositions." The value (over and above the annual exclusion) of all transfers made within three years prior to death, irrespective of motive, will be includible in the estate for transfer tax computation purposes. In addition, the transfer tax, itself, attributable to a lifetime transfer made "in contemplation of death" will now also be includible in "grossing-up" the estate.

One most onerous effect of the unified rate structure is to make cumulative all transfers, lifetime and at death. Under present law, only lifetime transfers are cumulative. That is, each successive transfer is aggregated with all prior transfers for purposes of computation of the transfer tax. From that tax is deducted all prior transfer tax paid. The result is to kick each successive transfer into the highest possible bracket.

However, not all incentives to inter vivos transfers are eliminated by the Act. To the extent that the gift is not within three years prior to death, both the transfer tax paid and all post-transfer, pre-death appreciation is removed from the estate. In addition, the annual exclusion ($3,000 single, $6,000 "split") remains unchanged.

Moreover, between now and January 1, 1977, additional incentives still remain. From and after September 9, 1976, the "good old days" are gone. Inter vivos transfers prior to that date are governed totally by the old rules. From and after that date, and prior to January 1, 1977, a hybrid of old and new rules applies. In particular, for any taxable gifts, the old and favorable gift tax rate structure applies. To the extent that the $30,000 lifetime exemption is still available to the donor, its use will result in the absorption of the new unified credit at a rate of only one dollar for each five dollars of the exemption used. For example, if a grantor making gifts between now and January 1, 1977, uses his full $30,000 lifetime exemption, it will cost him a $6,000 erosion of his unified credit. Accordingly, pre-January 1, 1977, gifts (particularly taxable gifts) may be a tax planning bargain to be seriously considered by our clients. Clearly, never again will it be possible to make inter vivos transfers as inexpensively, taxwise.

Marital DeductionAt Death: Generally, with respect to adjusted gross estates of less than $500,000, the marital deduction is liberalized under the Act. Whereas under present law the maximum marital deduction is limited to one-half of the adjusted gross estate, the Act effects a $250,000 floor. That is, the maximum marital deduction (still limited to that amount passing or which has passed from the decedent to the surviving spouse) will equal the greater of $250,000 or one-half of the adjusted gross estate.

Not to be overlooked in the ebullience of this good news, however, is the need for caution in drafting to insure that the marital deduction is not overqualified. Almost as egregious as not availing the estate of the deduction at all, is to over-qualify it. The blind structuring of instruments to maximize in all cases the marital deduction, while resulting in no1663 tax on the estate of the first to die, can effect needless and substantial tax on the estate of the survivor. For example, where a gross estate is exactly $250,000 and where the entirety of that estate is left outright to the surviving spouse, whereas the estate of the first to die would pay no estate tax, the estate of the survivor would pay $40,800 in estate tax in 1977. However, where the maximum credit of the first to die is availed...