Estate Planning: Hyperlexis and the Annual Exclusion Rule by Walter D. Schwidetzky

Walter D. Schwidetzky has made available for download his 1998 article, “Estate Planning: Hyperlexis and the Annual Exclusion Rule,” which was originally published in the Suffolk University Law Review.  The abstract reads as follows:

One of the true bonanzas in the Internal Revenue Code is I.R.C. § 2503(b). It permits taxpayers to make gifts of up to $10,000 per donee, per year without the application of a gift tax or the need to use any portion of the applicable exclusion amount. This “annual exclusion” rule of I.R.C. § 2503(b) is quite generous, inasmuch as there is no limit on the total amount of gifts a taxpayer may make. However, I.R.C. § 2503(b) requires that the gift be of a “present interest.” Future interests do not qualify. This distinction has caused a great deal of litigation, and achieved little. As I will discuss in more detail, donors can readily end-run the future interest limitation, giving rise to a recent Clinton Administration proposal to limit how I.R.C. § 2503(b) operates. While there is merit to the Clinton Administration recommendation, which I discuss in the proposal section of the article, I believe a more comprehensive approach is preferable. I would limit the total amount of gifts in a year that a donor can make under I.R.C. § 2503(b) to $30,000. I would also eliminate the “per donee” limitation. To reduce the compliance burden on the Service and the taxpayer, in addition to the $30,000 annual exemption, I would also exclude from taxation gifts of $250 or less per donee. With these changes in effect, there would be little need for the present/future interest dichotomy and I therefore would eliminate it. Finally, I would increase the applicable exclusion amount to offset the revenue increase these changes would otherwise give the government, so that the change would be revenue neutral.

My specific reasons for these changes, and my analysis of current law which leads me to conclude that the changes are called for, are revealed below. Underlying my proposals is the view that we have a deep-seated need to simplify the Code and the enforcement burdens on the taxpayers and the Service. In a misguided and ultimately unattainable desire for perfection, the Code has become unbelievably complex. It threatens to collapse under its own weight. Bayless Manning coined the term “hyperlexis” two decades ago, and defined it as a “pathological condition caused by an overactive law-making gland. Most federal and state legislatures suffer from hyperlexis. In this article, I borrow and modify the term to describe the seemingly insatiable need to complicate the tax law. We need to aggressively make an effort to simplify the tax law, even if it occasionally comes at the price of perfect equity (which is not achievable regardless) or certainty (though complexity usually creates more uncertainty than it eliminates). This article is thus an effort to do something about hyperlexis in one important and much used part of the Code.

Download the article at Estate Planning: Hyperlexis and the Annual Exclusion Rule by Walter D. Schwidetzky :: SSRN.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

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