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.

2010 Estate Planning

As of June 8, 2010 Congress has still failed to act to advise us as to what the exact tax implications will actually be for people who die in 2010. With the repeal of the Estate Tax and Generation Skipping Transfer ("GST") tax in 2010, anyone who contemplates that they could meet their demise in 2010 would be well advised to seek legal counsel immediately to update one's estate planning documents. In particular, anyone who utilizes a "formula clause" in one's will or trust to create sub-trusts after the first spouse's death for the benefit of a surviving spouse and/or family members (i.e. a "Marital Trust" and a "Family Trust") would be well advised to update his or her documents.

For larger estates the gift tax rate this year is at an all time low of 35%. Next year, the rates revert to 55%. Should one consider making taxable gifts this year to pick up a 20% savings for the benefit of one's heirs? Anyone who has to write a check to the "U.S. Treasury" next year for 55% rates would have thought that this would have been a wonderful idea!

Clients who face end of life issues may wish to update their Health Care Powers of Attorney and Living Wills in light of the year end tax issues for 2010. The time to make these decisions is well in advance of the events that cause the need for them.

Our best guess at this time is that we are not going to see any tax legislation before the November elections. Given the current circumstances of gridlock in Washington D.C. at this time, the thought of comprehensive tax legislation getting done before year end is looking more and more unlikely. We very well may be facing a situation starting on January 1, 2011 where every unmarried citizen who dies in 2011 will be paying 55% estate taxes on one's estate in excess of $1M dollars.

Estate Planning Update - No News

It is now May and so far it looks like the Senate is to busy to deal with Estate Tax Reform before November. It is looking more and more like 2010 will be the year when one can die without the imposition of any Estate taxes regardless of the size of one's estate. However, starting January 1, 2011 taxpayers will be limited to an exemption of only $1M dollars. Everything else above that number will be taxed at 55%.

I never dreamed that we would see the actual repeal of the Estate Tax. Nor did I imagine we would ever go back to exemptions and rates that were in effect in 2002. The Federal Estate Tax is like a sponge. It soaks up everything that one owns: cash, bank accounts, CD's, stocks, bonds, investment accounts, retirement plans, real estate and life insurance owned by the person who dies. When one totals up everything on this kind of basis, there are many more "millionaires" today than there were in 10 years ago. Your next door neigbbor might be a millionaire?

Married people get a special break called the "Unlimited Marital Deduction". Any property that passes at death to one's spouse, whether outright, as a designated beneficairy or as the beneficiary of a Marital trust, will qualify for deduction. Often this means there will be no tax at the first spouse's death! But, the IRS is not being that generous. They will just wait until the second spouse dies, subtract the $1M exemption, and then tax the excess at 55%. We often refer to the Federal Estate Tax as the "Tax on the 2nd spouse's life".

It is imperative that when the first spouse dies, that he or she use whatever exemptions are available to the deceased spouse in the year of death. Jointly held property will not get one there. The first spouse needs to set up a Family Trust(sometimes referred to also as a "By-Pass" trust, or a "Residuary Trust" or a "B-Trust"....lawyers just love to call the same thing by different names to confuse people!) at the death of the first spouse. That trust can be for the surviving spouse's benefit during his or her life. But, when the surviving spouse dies, this Family Trust can pass tax free to the heirs as it is not deemed to be "owned" by the 2nd spouse during his or her lifetime. This savings is huge! It could be as much as 55% of $1M dollars =$550,000 starting next year. Jointly held property in this set of circumstances actually increases one's taxes and becomes a trap. Planning before one becomes disabled or dies is essential.

It is entirely possible that we will get a new Tax bill after November's elections. A lot will depend on who is elected. Stay tuned. This is going to be a wild ride for millions of Americans.

Still No News on the Estate Tax Front

As this week comes to a close, the buzz among estate planners is what Congress has NOT done so far. Time is running out and the ability to fix the unthinkable is dissipating quickly. The unthinkable is that beginning January 1 we will see the elimination of the estate and GST taxes, coupled with the introduction of carryover basis for people who die in 2010. This means that because of the repeal of the estate and GST tax (which only the wealthiest of 2% of the population pays), Congress had to do something else to replace this loss of revenue. Their answer was to do away with the "stepped-up" basis rules and to institute a modified carry over basis for assets that one inherits. This means that starting in 2010 everyone will now pay increased income taxes to offset the tax revenue lost from the Estate and GST tax!

The House is scheduled to recess for the holidays on December 18 and the Senate is focused on health care reform. This is a true dilemma for the estate planning community is that we still don't know what to tell clients to do at this point in time? But on other fronts........

Trademark infringement is a serious matter. A recent case filed in St. Louis however is proving to be the butt of some jokes. For an interesting (and I thought humorous) read check out the following ABA article here.

Health care reform has targeted savings from electronic record keeping as a way to save costs. But the implications of that are staggering. Some are now pointing out the loss of privacy and the exposure of confidential health information. See E-health records.

To Tax Estates or Not? That is the Question!

Under the current tax code in effect right now, the Federal Estate Tax is scheduled to be repealed beginning on January 1, 2010. Under the current law in effect in 2009, a citizen can own up to $3,500,000 in total assets, and pay no Federal Estate tax. And, in Missouri we have no state estate tax either. Anything in excess of that amount is taxed at a current rate of 45%.

We have been thinking that Congress was going to "fix" this and pass a law extending the current Federal Estate Tax for next year. Senate Bill 722 would make the 2009 exempt amount and rate permanent. A House Bill 2032 would make the exemption amount only $2,000,000 and fix the rates for estates between $2M and $5M at 45%; 50% for estates between $5M to $10M and tax estates over $10M at 55%. Another House Bill, No. 436 would use the $3.5M exemption and a top rate of 45%. Meanwhile the Congressional Budget Office has thrown out 4 models for Congress to consider.

The truth is nobody knows what is going to happen? What is apparent is that we are fast approaching deadlock; and, if Congress fails to act before the end of the year, we may begin to see in January the tax equivalent of hell freezing over. Stay tuned. We will bring you the latest as soon as we know what is going to happen!

Estate and Gift Tax Update

What is Congress doing about the current situation whereby the Estate Tax will be repealed in 2010. President Obama has asked for legislation that would extend the current 2009 $3.5M exempt amount for another 3 years. But, so far nothing has happened. With the focus in Congress on health reform and cash for clunkers the "fixing" of the Estate Tax Code has seemed to have dropped off the radar screen.

Now this is my pure speculation. However, if the country becomes even more polarized over legislative agendas this Fall, I could see a scenario whereby the White House takes a pure party line approach. If no comprises are reached the Estate Tax will be repealed for one year in 2010. This means that if Warren Buffet died in 2010 his entire estate could pass estate tax free to his heirs. There would be no need for charitable planning from an estate tax avoidance point of view. I can actually picture people jumping off bridges on December 31, 2010 so that they can die to pass their estate to their heirs tax free. I can also picture junior who might wish to accelerate mom or dad's demise in 2010? One may wish to take a long cruise to stay away from anxious expectant heirs late in the year.

But, here is the kicker! Starting January 1, 2011 everyone who dies who has gross taxable estate in excess of $1,000,000 dollars would pay an estate tax of 55% on the excess over and above that amount. If you want to pick a on a constituency that does not vote, dead people fit the bill. And, if Congress is looking for an easy fix to ring in the tax dollars to pay for prior exorbitant spending, what better way than to say "we did not do anything. We just let the tax breaks expire." I hear a large sucking sound beginning to resonate in Washington, D.C. that will impact us all.

In light of all the uncertainty, the one thing that everyone who has an estate of over $1M should do is to update their estate plan to take all these scenarios into account. Many people will be lulled into a false sense of security thinking that this will not apply to them. What they do not realize is that the estate tax is like a giant sponge. It soaks up everything that one owns at death. This includes not only a person's so called "liquid assets" like cash, bank accounts, stocks, bonds, etc. but it also includes equity in real estate, all of an individual's retirement plans such as IRA's , 401(k) plans, annuities and the face amount of all life insurance owned by a decedent. When people add up all of this they are shocked to discover that on paper their estates are a lot larger than they think. The first dollar over $1M could be at risk of a possible 55% haircut.

Stay tuned as the script is not even been written on this yet!