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AICPA Members Respond to Estate A request by Congress led the AICPA Tax Division to survey its membership about the current Federal wealth transfer tax system. This article discusses the respondents' beliefs and their perceptions of ideas for reform. Roby
B. Sawyers, Ph.D., CPA Byrle
M. Abbin, CPA John
H. Gardner, JD Eileen
Sherr, MT
Editor's note: Roby Sawyers is the Chair of the AICPA Tax Division's Trust, Estate and Gift Tax Technical Resource Panel's Estate Tax Repeal Task Force. Byrle M. Abbin is the Task Force's Vice Chair. John H. Gardner is the Technical Resource Panel's immediate past Chair. Eileen Sherr is the Task Force's Technical Manager. Ms. Sherr's views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through specific committee procedures, due process and deliberation. Authors' note: The authors would like to thank the other Task Force members: Barbara A. Bond, Hood and Strong LLP; Evelyn M. Capassakis, Pricewaterhouse- Coopers LLP and Trust, Estate and Gift Tax Technical Resource Panel Chair; Robert M. Caplan, Caplan & Solon, LLP; Ruchika Garga, Moss Adams LLP; and Brian T. Whitlock, Blackman Kallick Bartelstein LLP. For more information about this article, contact Ms. Sherr at esherr@aicpa.org or Dr. Sawyers at Roby_Sawyers@ncsu.edu.
Executive Summary
In the last several years, reform of the estate, gift and generation-skipping transfer (GST) tax systems has become an increasingly important social and political issue. Congress, the Administration, taxpayers and their advisers have become increasingly interested in restructuring or repealing the current wealth transfer tax system. In light of the increased interest in transfer tax reform, the AICPA Tax Division formed an Estate Tax Repeal Task Force (task force) in 1999 to study the issue. At about that time, Sen. Jon Kyl (R-AZ) asked the AICPA to respond to S. 1128, the Estate Tax Elimination Act, which would have repealed the estate tax and instituted carryover basis. The task force reviewed the bill, met with the Senator's staff and the staff of the Senate Finance Committee in October 1999, and responded on Feb. 16, 2000 with a written analysis and critique approved by the AICPA's Tax Executive Committee. That analysis is available on the AICPA Website, at www.aicpa.org/letters/index.htm . As estate tax repeal legislation gained momentum in the 106th Congress, the task force decided to study the issue of transfer tax reform further, including possible alternatives to the current system. The task force surveyed AICPA Tax Division members to assess their opinions on the current wealth transfer tax system and its alternatives. The results of the survey are summarized below and are available on the AICPA Website, at www.aicpa.org/members/div/tax/membersurvey.htm.
Survey Details On May 19, 2000, a detailed survey was e-mailed to 3,826 Tax Division members.1
Demographics The survey had a 21% response rate, with 806 individuals responding. Of these, 752 routinely provided estate planning and compliance services to clients and offered their opinions on the current system and preferences for various alternatives. Respondents had an average of 22 years of experience as CPAs, with 93% having over 10 years of experience. The respondents primarily represented the upper levels of management in their firms—59% were partners or shareholders and 29% were sole practitioners. Most of the respondents were from smaller firms—84% worked for a local firm, 10% were employed by a regional firm and 5% were employed by a national firm. Over 50% of the respondents worked in the Southeast and Southwest. Sixty-five percent of respondents had between 100 and 500 individual tax clients in 1999 and 15% had over 500. On average, almost 30% of the respondents' individual tax clients required some sort of wealth transfer planning in 1999.
Estate Planning Techniques Over 93% of respondents indicated that they provide estate planning and related compliance services to clients. Estate planning techniques used by respondents (from most common to least) include: 1. Annual exclusion giving (used by 81% of respondents). 2. Bypass trusts (78%). 3. Irrevocable life insurance trusts (59%). 4. Inter vivos charitable giving (53%). 5. Family partnerships (42%). 6. Absorption of exemption equivalent giving (40%). 7. Other corporate or passthrough entities (37%). 8. Education and medical exclusions (31%). 9. Charitable giving at death (30%). 10. Generation-skipping trusts (22%). 11. Grantor retained annuity trusts, qualified personal residence trusts, etc. (20%). 12. Fully taxable gifts (11%). 13. Offshore trusts (1%).
Client Issues Of the 752 respondents providing estate planning and compliance services to clients, 81% indicated that the transfer of a closely held business to the next generation was a major transfer tax and succession tax issue. Almost 13% of respondents said that one or more clients had been forced to sell a closely held business or family farm to pay estate taxes in 1999. Forty-four percent indicated that one or more additional clients would have had to sell their business absent planning or counseling. Other major issues were: providing for (1) a spouse (81%), (2) children (62%), (3) grandchildren (18%) and (4) charitable contributions during life or at death (11%). When asked about liquidity issues, closely held business liquidity was a major issue faced by clients for 74% of respondents, followed by liquidity for: retirement plans (including pension plans, Keoghs and IRAs) (67%); real estate (other than personal residences) (44%); family farms (23%); stock options and restricted stock (16%); personal residences (15%); and large installment obligations (i.e., sale of land contracts and deeds) (12%) (see Exhibit 1).
Advantages and Disadvantages of Current System Respondents had mixed views on whether the current wealth transfer tax system should be retained. While 49% said the current system "probably" or "definitely" should not be retained, 39% said it "probably" or "definitely" should be retained. Respondents noted as advantages the fact that the current transfer tax system:
The disadvantages of the current transfer tax system included the fact that the tax:
Alternatives When asked to rank six alternatives to the current transfer tax system, 59% of respondents preferred modifying it by lowering rates and/or increasing the applicable exclusion amount. Nineteen percent preferred a 10-year phaseout of the transfer tax, while 15% preferred immediate repeal with a limited basis step-up. Less than 2% preferred other options, including immediate repeal of the current tax, coupled with a new:
If the current wealth transfer tax is modified, 63% of respondents said they would prefer increasing the applicable exclusion amount ($675,000 for 2001, increasing to $1 million by 2006), while 16% preferred reducing the top marginal tax rate, and 11% preferred extending or adding simple, workable liquidity relief alternatives.
Applicable Exclusion Amount If the current transfer tax system were modified, respondents thought that the applicable exclusion amount should be increased to a median of $3.5 million and a mean of $8.6 million. Responses varied greatly, as follows:
Respondents were also asked how large the applicable exclusion amount would need to be to eliminate transfer tax liability concerns for 90% of their clients. The applicable exclusion amount would need to be increased to a median of $4 million and a mean of $8.8 million.
Maximum Tax Rate If the current wealth transfer tax system is modified, the vast majority thought the maximum rate should be reduced. Over 85% thought it should not exceed 40%, with an average (mean and median) 25% maximum rate (see Exhibit 2).
Carryover Basis Several questions were asked about respondents' views on replacing the current unlimited step-up in income tax basis to fair market value (FMV) at date of death with a limited basis step-up for assets up to the applicable exclusion amount, and a carryover basis for assets in excess of that amount. A majority of respondents indicated that calculating carryover basis would "definitely" or "probably" cause significant problems for clients for various categories of assets, including: collectibles (77%), other personal property and household goods (77%), mutual funds (65%) and listed securities (58%). Calculating carryover basis for a personal residence or other real estate was viewed as less problematic, but would definitely (42%) or probably (45%) cause significant problems for clients. The following percentages of respondents thought that calculating carryover basis would "definitely" not or "probably" not be a significant problem for clients: personal residence (51%), other real estate (46%), listed securities (39%), mutual funds (31%), other personal property and household goods (22%) and collectibles (14%). When asked how high a basis step-up was needed to exempt 90% of their clients from a carryover-basis regime, the median response was $3 million; the mean response was $8.5 million. However, as Exhibit 3 shows, there was a great deal of variation in responses.
Conclusion Based on the survey results, AICPA Tax Division members see advantages and disadvantages to the current wealth transfer tax system. A majority of members prefer to modify it, rather than repealing it and imposing a carryover-basis regime, phasing out repeal over 10 years or instituting an income tax on appreciation at death. If the current system is modified, the preferred alternative is to increase the applicable exclusion amount, followed by reducing the maximum tax rate. Seventy-two percent of respondents preferred to increase the exclusion amount to at least $2 million, while 85% thought the applicable exclusion amount should not exceed $10 million. Increasing the applicable exclusion to a median of $4 million and a mean of $8.8 million would eliminate estate tax concerns for 90% of survey respondents' clients. The preferred maximum tax rate was 25% (mean and median), with 85% of respondents preferring a maximum of no more than 40%. 1At the time of the survey, there were 23,007 Tax Division members, with 13,187 indicating an interest in estate tax issues. Of these, 4,973 had e-mail addresses on file and 3,826 of these worked in public accounting.
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