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.

Here We Go Again....Proposed New Rules for IRA's.

On Tuesday, Senate Finance Committee Chairman Max Baucus announced he will release a modified Chairman's Mark of The Highway Investment, Job Creation and Economic Growth Act of 2012 ahead of the Committee's consideration of the bill. Under the proposal, the five-year rule is the general rule for all distributions after death for plans and IRA's (regardless of whether the owner dies before or after the required beginning date) unless the beneficiary is an eligible beneficiary as defined in the proposal. This would apply to deaths occurring after 2012. Eligible beneficiaries include any beneficiary who, as of the date of death, is the surviving spouse of the employee or IRA owner, is disabled, is a chronically ill individual, is an individual who is not more than 10 years younger than the employee or IRA owner, or is a child who has not reached the age of majority. For these beneficiaries, the exception to the five-year rule (for death before the required beginning date) applies whether or not the IRA owner or employee dies before or after the required beginning date. In addition, the five year rule would apply after the death of the beneficiary.

While this is only proposed legislation, it does show how some in Congress want to find new ways to increase our income taxes in the years to come.  Leaving money in an IRA (or any type of qualified plan, i.e. 401(k), 403(b), etc.) at death is the worst place to leave one's wealth for heirs to inherit anything.  That is why these vehicles are called "Retirement Plans".  One is to "use" these monies while one is alive during your retirement years to live on.  So many people make the mistake of only taking minimum distributions late in their retirement years allowing wealth to compound tax free.  But, never forget that this is only "tax deferral" and not "tax avoidance".  Every IRA guarantees that there will be at least two kind of taxes at death.  First, (i) an income tax; and (ii) secondly, an estate tax if one exceeds his or her basic exclusion amount.  People would be better leaving these assets to qualified charities when they see the tax brackets of what the IRS will take when people die. And, it is only continues to look worse with these kind of proposals.  Stay tuned.