The Obama administration has released it’s proposed 2013 budget. This proposal includes numerous wide ranging estate and gift tax reforms. It is nearly certain that this budget will never come to pass, however, a quick review of the important provisions is useful to give advisers and our clients a sense of what may be coming down the road.
The key provisions are:
1. Restore the 2009 Rate and Exemption. $3.5 million for estate and GST taxes, a $1 million exemption for gift taxes and a 45% maximum tax rate.
2. Retain portability of unused estate and gift tax exemption between spouses. This provision was first enacted in the December 2009 tax act.
3. Require consistency between asset values for transfer taxes and income tax. This would require taxpayers to report the same basis and values for all tax purposes.
4. Limitations on Discount Planning for Family-Controlled Entities. In an attempt to reduce discounting of interests in family partnerships and other closely-held entities, valuation rules will be enacted under Section 2704 to disregard limits on an owner’s right to liquidate interests and limits on the ability to be admitted as a full partner or hold an equity interest.
5. 10 Year Minimum Term for Grantor Retained Annuity Trusts. In addition the remainder interest of a GRAT would have to be above zero in value. The writing has been on the wall about this for some time now. GRATs are very powerful tax savings vehicles, and efforts to curb their use have been popping up with greater frequency during the past few years.
6. Limit GTS Exemption for Trusts to 90 Years. Perpetual dynasty trusts would be far less attractive (from a tax perspective). Of course, state laws would still permit perpetual trusts, but the IRS would simply hit the trust with GST tax after 90 years.
7. Grantor Trust Status = Estate Tax Inclusion. This is a monstrous proposal. Not only is the interplay between income tax status and estate tax inclusion a very valuable tool for planners, but it amazingly easy to inadvertently trigger “Grantor Trust” status and thus estate inclusion even for trusts where the Grantor has no interest or powers in the Trust whatsoever. This proposal has draconian implications.
As mentioned above, these proposals, at least in current form, are unlikely to see the light of day. However,we will be keeping a close eye on Washington and make sure all of our clients remain up to date with the latest tax law changes.
As always, please don’t hesitate to contact me with any questions or concerns.
All the best,
Joe
