Monday, April 15, 2013

Estate, Gift and GST planning impact of President Obama's Proposed 2013 Budget

The recently passed  2012 Taxpayer Relief Act that was signed into law on January 2, 2013 was supposed to provide "Permanent Tax Relief".  Under the President's budget proposal that tax relief does not look so permanent right now.  Among other things the President would like Congress to make the following changes to the existing tax code:
  1. The current estate tax and Generation Skipping Tax ("GST") exemptions which are currently $5.25M each would be lowered to $3.5M.
  2. The estate tax rate would be increased from the current 40% to 45% of amounts over the $3.5M threshold.
  3. The current lifetime gift tax exemption would be decreased from $5.25M to $1M.
  4. The current unlimited term for GST exempt trusts would be capped at 90 years.  Existing GST exempt trusts would be grandfathered. However, pre-1986 GST trusts which were previously grandfathered become disqualified if any new contribution is made to such a trust.  One may wish to consider decanting, severing or reforming insurance and other trusts before the end of 2013 if this provision were to become law.
  5. Sales to Intentionally Defective Grantor Trusts ("IDGT's) would be eliminated on a prospective basis.  Current dynasty trust transactions would be grandfathered; but, any new additional sales would not be protected.
  6. The current use of rolling Grantor Retained Annuity Trusts ("GRATs") would be eliminated on a prospective basis.  There would be a minimum 10 year term to a GRAT.  If the person who sets up the GRAT dies within 10 years from the creation of the GRAT it is sucked back into the decedent's taxable estate.  GRATs could no longer be "zeroed" out for gift tax purposes.
  7. A Buffet rule would impact those with incomes greater than $1M.
  8. Itemized deductions would be reduced to a credit for those with incomes greater than $250,000.
  9. Carried Interests capital gain treatment would be eliminated.
  10. A special provision would eliminate the ability to retain more than approximately $3,400,000 in an IRA or pension plan.
Many have labeled the President's budget as dead on arrival in Congress.  However, an analysis of what the administration is looking for in terms of increased revenue requires vigilance of one's current estate plan.

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