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.

2011-2012: The Time to Plan

Congress has given those who plan estates a wonderful 2 year window before the possible return of the estate tax in 2013. The 2010 Tax Act kicked the can of Bush tax cuts down the road for two years. In addition, Congress increased the size of the exemptions from tax. The new limits are set to expire on December 31, 2012. But, in the meantime, here are the current limits:

1. Gift Tax Exemption: Individuals can now make lifetime gifts up to a $5M and exclude the transfer from tax by filing a Federal Gift Tax return allocating one's lifetime gift tax exemption.
2. Generation Skipping Transfer ("GST") Tax Exemption: Individuals can now set up trusts for younger beneficiaries and use a $5M GST lifetime exemption. This is a "use it" or "lose it" exclusion. Once a person dies, this exemption disappears.
3. Annual Exclusion Gifts: In addition to the use of one's lifetime exemptions, an individual can also make annual exclusion gifts of up to $13,000 per year per donee without any adverse tax consequences.
4. Estate Tax Exemptions: An individual can die in the next 2 years and not pay any Federal tax on estates of less than $5M. In addition, for spouses dying in 2011 and 2012 it will now be important for the personal representative of a deceased person's estate to file a gift tax return passing along a deceased spouse's Unused Spousal Exclusion Amount to one's spouse. Effectively, the surviving spouse could then have up to $10M worth of estate tax exemption. However, the GST tax exemption cannot be transferred in this manner.

This means that families with wealth who wish to plan ahead can do some extraordinary things to benefit future generations. The use of an Irrevocable Life Insurance Trust ("ILIT") which can be funded with life insurance creates opportunities for tremendous tax leverage for future generations. Clients who have illiquid assets, such as a family business or a farm, can use an ILIT to balance out distributions between multiple beneficiaries.

Another strategy that received a reprieve was the use of the Grantor Retained Annuity Trust ("GRAT"). This strategy coupled with an ILIT can make intergenerational wealth transfers a significant part of giving what one has, to whom one wishes, the way one wishes, at the lowest possible tax impact. Those who choose to plan in the next two years will benefit their families significantly over those who do nothing.

The time to do this planning is now! Every day one waits you run the risk of losing these opportunities.

It is now up to the President

Last night while most of us were sleeping, the U.S. House of Representatives passed the "The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" [hereinafter the "2010 Act"] and sent it off to the President to sign on December 17, 2010. This band aid of legislation is only effective for two years. Yes, we will be right back where we are today looking at $1M dollar estate tax exemptions and a 55% estate tax rate all over again in December 2012! What a way to run a railroad? Assuming that President Obama signs this new law, there are a variety of new provisions which we will have to incorporate into our estate planning practice. Here are a few of the highlights:

1. Estate Tax for 2010: Exclusion Amount $5M with a maximum tax rate of 35% and the option to elect carryover tax basis instead of estate tax treatment. The Gift Tax exclusion amount will remain at $1,000,000 (no change) and at a 35% gift tax rate (no change).

2. Estate Tax for 2011-2012: Exclusion Amount $5M with a maximum estate tax rate of 35%. The Gift Tax exclusion amount will increase to $5M and maintain a rate of 35% (no change).

3. One of the new features is the use of a deceased spouse's exemption amount ("portability") for spouses who die in 2011 and 2012. In essence, married couples will get the use of a $10M exemption under certain circumstances.

There is much to be studied and absorbed from this legislation. We will bring you more details ahead in the coming days.

Year End Tax Reform Controversy Contines

On Monday, December 6, President Obama announced that he had reached a compromise with the Republican Senators for a two year extension of the Bush-era tax cuts. The projected estate tax exemption would be $5 million per citizen with an effective tax rate of 35% over and above $5 million ( down from the scheduled $1 million exemption and a 55% tax rate scheduled to take effect on January 1, 2011). In exchange the unemployment insurance benefits (including a 2% reduction in payroll tax, from 6.2% to 4.2%), would become effective in 2011.

Almost immediately this compromise drew fire from both sides of the aisle. For example, Republicans were uneasy awaiting details of the plan. At the same time some Democrats have announced their opposition to the passage of this legislation. This is not a done deal.

All we can suggest is that clients stay tuned for the latest developments. No doubt a $5 million dollar exemption would be welcome news to 99% of all Americans who would not be bothered with Federal Estate Taxes. But, if Congress fails to act, those Americans with estates over 1 million dollars may wish to avail themselves of some gift giving opportunities in 2010. The shopping days in December are rapidly coming to a close.

Estate Tax Battle Resumes

Secretary of the Treasury, Timothy Geithner, and the Senate Finance Charmian, Max Baucus agree on one thing. Both want to extend the 2009 estate tax rate and exemption amount to 2010 and make it retroactive to January 1, 2010. In the 2011 budget released Feb. 1 by President Obama, the administration is backing the legislation passed by the House last December to repeal the repeal of the Estate Tax in 2010. Too bad nobody has explained to them the due process clause of the Constitution has been interpreted such that the tax code in effect as of the date of a person's death is the law that is to be imposed. Anyone who has a relative who has died in 2010 and who inherited amounts in excess of the proposed $3.5M exemption may wish to contest such retroactive application of any new estate tax law.

Some insiders suggest that the estate tax bill could be linked to the proposed jobs bill being submitted to boost the economy. All we can say is "stay tuned". The final chapter in this area has not yet been written.

Welcome to 2010!

The start of a new year brings with it some very interesting tax developments. Congress adjourned and promised to come back and fix the estate and generation skipping tax this year. So right now if anyone wants to die and pass thier estate along without the impositon of any estate tax at the federal level, the opportunity is yours! Tough advice to give to a client!

However, the generation skipping tax ("GST") is also no more. Anyone contemplating gifts in excess of the current $1,000,000 lifetime gift tax exemption will not have to pay GST tax of 45% to gifts to grandchildren. The gift tax rate was reduced from 45% to 35%. While Congress has talked about making any new taxes retroactive to January 1, 2010, there is some thought that that may be unable to do so based on prior case law. So there exists a window of opportunity for those willing to play the game.

The bad news is that Congress had to come up with some way to make up the revenue loss. So they invented something for this year called "modified carryover basis". This means that the executor of a decedent's estate can elect to "step up" the first $1.3 million of assets to the fair market value of a deceased person's estate as of the date of death. But anything else will be subject to "carryover basis", i.e. the basis in the hands of the heirs will be the same as the lifetime basis of the person who died owning the asset....unless, the decedent was married! A spouse is entitled to an additional $3M dollars of step up in basis election. The result is to increase the income tax on the sale of inherited assets at the time of a subsequent sale. The accounting profession will love this new computation. Congress tried this back in 1976. After two years when they admitted that it was so complicated that nobody could compy with it, Congress repealed it. Now this new system is back again in 2010. I wonder how long it will take Congress to remember that this was a mistake the first time and it is not any better the 2nd time around.

Conclusion: This is the year that everyone should review their estate planning documents to see what the current repeal of the Estate tax does to one's estate planning. There are still so many unknowns that are difficult to predict; but, high net worth estates may be able to do some things right now that will not be available later.

The Higher Cost of Dying in other states

The Federal government is trying to decide what size of estate tax exemption citizens are going to have next year from the Federal Estate Tax. Under current law the exemption amount is currently $3,500,000.00 in 2009. If Congress does nothing the Federal Estate Tax exempt amount will be unlimited beginning January 1, 2010. I am betting we are going to see last minute legislation at the end of December to prevent the repeal of the repeal of the Estate tax for 2010.

However, state governments are also feeling the economic pinch and looking for ways to increase tax revenues. Dead people are an easy constituency to squeeze because they do not vote. For example, the State of Illinois "decoupled" its estate tax from the federal exemption amount beginning January 1, 2009. In Illinois anyone who dies this year pays an additional estate tax over anything one owns in excess of a $2,000,000 exemption from Illinois estate tax. What does the mean? If a Missouri resident dies with a $3,500,000 taxable gross estate in 2009, the taxpayer pays $0 Federal estate tax and $0 Missouri estate tax. The same taxpayer who dies in Illinois this year pays $0 Federal estate tax and $209,124 in Illinois estate tax. Picking the right state to die in for tax purposes can save some real dollars! Living on the correct side of the Mississippi can benefit one's loved ones significantly!

I think the Missouri tourism commission ought to adopt a new campaign to attract older citizens to move to Missouri before they die.

The House passes Tax Relief (Sort of)

On December 3, the U.S. House of Representatives passed the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (H.R. 4154) by a vote of 225 to 200. Not exactly a land side; but, a beginning.

H.R. 4154 would:

· make permanent the $3.5 million estate tax exemption

· make permanent the 45 percent top rate.

· Prevent the untenable and unworkable switch (scheduled to take effect in 2010) from step-up to carryover basis.


One of the shortest tax bills ever to be passed, it is notable for what it does not say. Many of the changes requested by the Treasury department are absent. It is now up to the Senate. A lot has to occur before this becomes law. Stay tuned for further updates.

Lawmakers Scramble to Extend the Estate Tax

The bonanza of passing one's estate free of federal estate tax might actually happen on January 1, 2010. Due to a quirk in the tax code, the estate tax and generation skipping tax ("GST") are repealed for one year starting next year. Currently, anyone with a taxable estate of less than $3,500,000 is exempt from Federal Estate tax (and in Missouri from state estate tax as well). The Senate is considering legislation that would extend the $3,500.000 exemption another year in essence repealing the repeal of the estate tax. But, with time running out and the agenda focused on health care reform, there may not be time to do anything this term.

Starting in 2011 the Federal Estate Tax and GST tax would return and tax everything that one owns in excess of $1,000,000 at a 55% rate. This means that those who are very rich could take advantage of the one year repeal by dying in 2010. While this is a tough advice for any client, think of the social mayhem that could result by leaving such tax policy in place? Congress needs to act responsibly and deal with this legislation before it adjourns. Stay tuned for further updates.