AICPA study on reform of the estate and gift tax system.

• Author: Sawyers, Roby B.
• Position: American Institute of Certified Public Accountants

While the transfer tax system (encompassing the estate, gift and generation-skipping transfer taxes) has historically targeted the very wealthy and currently affects a small percentage of all estates, increasing numbers of taxpayers with moderate wealth are likely to be subject to the tax in the future. In addition, many taxpayers are concerned over the impact of transfer taxes on estates that consist primarily of small businesses, family farms and illiquid or inaccessible assets. These escalating concerns have caused most observers to agree that some form of reform to the current system is appropriate. The debate centers on how, not if, the system should be changed.

To this end, the AICPA has undertaken an analysis of changes to the transfer tax system, including substantial modifications and outright repeal.

After a year-long effort, the AICPA Tax Division has completed its work. The study, developed by the Trust, Estate, and Gift Tax Technical Resource Panel's Estate Tax Repeal Task Force, provides an overview of the arguments that have been made both for and against the current transfer tax, a summary of the current system, and a description of possible modifications and alternatives (including outright repeal). For each modification or alternative, there is an analysis of its impact on taxpayer behavior, complexity and compliance, liquidity, redistribution of wealth, tax and succession planning, revenue and transition issues, as well as a discussion of advantages, concerns, suggestions, and conclusions for each modification and alternative.

This study, the purpose of which is to educate and enlighten, confirms that significant reform of the U.S. transfer tax system is appropriate and should be undertaken as quickly as possible. In it, the AICPA has identified a number of significant issues, and the study makes substantive suggestions that the AICPA hopes will be considered in crafting any legislative proposal. The study offers suggestions on each of the alternatives not as a matter of ideology or social policy, but as a result of the AICPA's judgment as to the best way to achieve simplicity, reduce taxpayer compliance burdens, improve ease of administration and address revenue considerations with respect to the overall tax system.

The study is available on the AICPA Website at www.aicpa.org/members/ div/tax/index.htm.

Executive Summary

Background

Significant reform of the U.S. transfer tax system has become the topic of much discussion and debate to the point that it is now an important political, social, and economic issue. The current transfer tax system consists of a set of complex laws that apply to estates, gifts, and generation-skipping transfers. These laws are separate and distinct from our income tax system. However, the transfer tax and income tax systems interact with each other in an attempt to achieve overall fairness and congruity in a system of taxation designed both to raise revenue and to achieve various policy goals. Therefore, significant reform of the transfer tax system necessitates an examination of the impact of such transfer tax changes on the income tax system, and how both systems affect complexity, taxpayer compliance burdens, ease of administration, and revenue.

Although historically the transfer tax has been targeted at the very wealthy and currently is paid by less than two percent of all estates, without significant change increasing numbers of taxpayers with moderate wealth will be subject to the tax in the future. Furthermore, huge increases in the value of retirement assets, personal residences, real estate, stock options, and other forms of illiquid or inaccessible wealth have exacerbated the liquidity and tax payment problems, which traditionally, have primarily affected small businesses and farmers.

These factors and others have caused most observers to agree that some form of modification to the current system is appropriate. The debate centers on how, not if, the system should be changed. Congress has considered a variety of approaches to estate tax reform over the last few years. For example, a recent legislative proposal would have reduced transfer tax rates over a ten-year period, followed by a repeal of the transfer tax combined with a new carryover basis regime applied to inherited assets. Although this proposal would have repealed the transfer tax, it would also have increased the complexity and amount of income taxes paid by many heirs. Other proposals would have made relatively minor changes to the transfer tax system, focusing instead on providing targeted relief to farmers and small businesses.

The American Institute of Certified Public Accountants (AICPA) is the national professional association of Certified Public Accountants (CPAs), with more than 350,000 members. Its members practice in public accounting, industry, government, and academia, and represent the full spectrum of political persuasions. As business and financial advisers, and as major participants in the administration of both the income and transfer tax systems, CPAs are uniquely well positioned to contribute to this dialogue from an objective, nonpartisan perspective...