Simplifying the Internal Revenue Code is not easy. It may be impossible because of the way that the tax law is created.
Sometimes a member of the House or Senate will sponsor legislation for a constituent. This legislation may be attached to a bill (called a "Christmas tree" bill because of the "ornaments" attached to it) it has nothing whatever to do with.
Father establishes a trust under which Son receives income for life. Upon Son's death, the property is distributed to Grandchild. That is a generation-skipping transfer, and, twenty-five years ago, a GST tax of 55% applied when the property was distributed to Grandchild.
In 1986 there was one GST exemption of $1,000,000 per person. That is, Father could establish a generation-skipping trust funded with $1,000,000 in which Son would receive income only, and then the property would be distributed to Grandchild. The trust might be set up as a "dynasty trust" so that it would continue for generations. Because there was no estate tax imposed as the property cascaded through the generations, it could grow substantially.
A wealthy family of vintners feared that the fortune they wanted to pass to their descendants would be crushed by estate taxes. They would whine if their assets could not be passed along to their grandchildren in a tax-efficient manner.
A generation-skipping trust for each grandchild would be useful, but the two brothers had twenty grandchildren and each brother had only one $1,000,000 GST exemption. What to do?
They contacted their favorite Senator, who Doled out a solution for them. He arranged for an amendment to the law, which lasted for a period of two years, which allowed a taxpayer to claim an exemption of $1,000,000 for as many generation-skipping trusts as he had grandchildren.
The brothers had twenty grandchildren. Each brother, with his wife joining in, could establish an exempt trust for his grandchildren and his brother's grandchildren.
With Senator Dole's help, the two brothers and their wives were able to bottle up a total of $80,000,000 in exempt trusts. The family must have thought that Robert Dole was a real corker.
The "Gallo Amendment" is only one illustration of what makes the tax law complicated and difficult to simplify. We will talk about more later.
