President's Budget Proposal Would Significantly Increase Estate and Gift Taxes

If you ever want to find out the estate planning techniques that are saving the most estate taxes, take a look at a Democratic President’s wish list for making changes to estate and gift taxes. President Obama’s fiscal year 2013 budget proposal recommends numerous changes that would significantly increase estate and gift taxes.

The headlines deal with exemptions and rates. Currently, the estate, gift, and GST exemptions are at $5,120,000. The President wants to reduce the estate and GST exemptions to $3,500,000 and the gift tax exemption to $1,000,000. He wants to increase the rate for estate, gift, and GST taxes from 35% to 45%. 

On the good side, the President wants to make portability permanent. Portability allows a surviving spouse to use the deceased spouse’s unused estate tax exclusion.

Though the changes to the exemption levels and rates are significant, there are a number of other changes that will cost some taxpayers even more in taxes than the changes in rates and exemption levels.

The President wants to make it significantly harder to claim valuation discounts for family limited partnerships. This provision was on President Clinton’s wish list for the last few years of his presidency and resurfaced after President Obama became president. To date, Congress has paid little attention to this recommendation.

The President wants GRATs to have a minimum term of 10 years. This proposal has also been around for 2 or 3 years. Congress has shown some interest in enacting this provision, though there are no current bills of which I am aware.

The President wants to eliminate the use of long-term dynasty trusts to evade GST taxes. His proposal would eliminate GST protection for trusts after 90 years. Trusts created before the enactment of such a rule would be “grandfathered” from this tax so that they could continue to be protected.

Perhaps the most troubling proposal is a new provision that would coordinate income and transfer tax rules applicable to grantor trusts. Under this proposal, assets in a grantor trust would be included in the estate of the grantor for estate tax purposes. Distributions from the trust to the beneficiaries of the trust during the grantor’s life would be subject to gift tax. If the trust is converted from a grantor trust to a non-grantor trust during the grantor’s lifetime, all assets in the trust would be subject to gift tax at the time of the conversion. These rules would apply for trusts created on or after the enactment date and with regard to any portion of a pre-enactment trust attributable to a contribution made on or after the enactment date. My initial reaction to this proposal is that it is totally unworkable and will never be enacted.

For the sake of our clients, I hope that these various proposals are not enacted. They are the heart and soul of the techniques that we use to help our clients transfer more of their assets to their loved ones. However, even if they outlaw these techniques, we will find new ones.

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