Obama's Budget Proposal and Estate Taxes -- Back to the Future

As has been widely reported, President Obama's proposed 2013 budget would eliminate the Bush-era income tax cuts for the "wealthy," and would require those earning more than $1 million per year to pay at least 30% of their earnings in Federal income taxes.  In addition, the capital gains rate for higher income earners would increase to 20%.

Less widely reported are some of the key estate and gift tax related proposals:

• a $3.5 million per person estate and gift tax exemption
• elimination or restriction of several advanced estate and gift tax reduction techniques, including the use of minority discounts and Grantor Retained Annuity Trusts ("GRATs").
• elimination of the "Intentionally Defective Grantor Trust" ("IDGT") technique that presently allows for the sale of assets to a trust in which the trust assets grow outside of the grantor's taxable estate, with the grantor paid by the trust for the assets sold to a trust via a promissory note.  Since under the current grantor trust rules the sale of the assets to the IDGT is considered for income tax purposes a sale to the grantor himself, there is no recognition of gain on the transfer.

Elimination of some or all of these advanced estate and gift tax planning techniques would certainly pose challenges to estate planners in helping their clients reduce exposure to estate and gift taxes.

Given that we are in an election year, and given the acrimony between the Republicans and the President, the chance of Obama's proposed budget passing largely intact is virtually nil.  That being said, Congress faces a December 31st deadline for the repeal of all the existing Bush tax cuts, so something will have to give between now and the end of the year.  We shouldn't be surprised, then, if the estate and gift tax exemption is reduced  to $3.5 million, and if some if not all of the advanced estate and gift tax planning techniques are eliminated.

With all the uncertainty, we are advising all of our high-net worth clients to plan now at a time when we can rely on some wonderful planning techniques to achieve significant estate and gift tax savings.

If you're a true policy wonk, an explanation of the proposed budget can be found here.

Obama's New Estate Tax Proposal

With the ink barely dry on the recent federal estate tax legislation that set the federal estate tax exemption at $5 million per person through December 31, 2012, President Obama's recently proposed budget includes a proposal to return the federal estate tax exemption to its 2009 level of $3.5 million per person effective January 1, 2013.  The President's proposal would also include the current "portability" provision that permits the allocation of any unused estate tax exemption upon a first spouse's death to be "added to" the surviving spouse's exemption upon the death of the surviving spouse.  If approved, the new rules would place some limits on the use of valuation discounts and GRATS that are commonly used in planning for clients with larger estates.

At first glance I think this plan is a good start.  It would allow the vast majority of estates pass without being subject to a federal estate tax, while bringing in some revenue from the wealthiest American families to help reduce the budget deficit. Of course none of that will help unless Congress and the President are able to rein-in the entitlement programs (e.g. Medicaid, Medicare, Social Security).

Click here for more detail about the President's proposal.

The WSJ Weighs-in On the Estate Tax Debate

The Wall Street Journal recently ran a special report on the future of the federal estate tax.  Among the articles are recommendations from various estate planning experts providing advice for how people should be planning given the uncertainty surrounding the estate tax. The most common suggestion is for those with larger estates to take advantage of the temporary "estate tax free" and low interest rate environment to shift wealth between generations this year.  Some common techniques would include selling assets to Intentionally Defective Grantor Trusts (IDGTs) or transferring assets via short-term Grantor Retained Annuity Trusts (GRATs).  Using short-term GRATs may be a limited opportunity, as Congress is considering limiting or eliminating this strategy.

Will Geroge Steinbrenner Get The Last Laugh Over the Tax Man?

It appears that George Steinbrenner has outsmarted everyone again. While many people thought his fleecing of CBS in 1973 when he purchased the Yankees for the paltry sum of $10,000,000 could not be topped, his sudden death yesterday may save his estate from paying millions of dollars in federal estate taxes. As is widely known, the federal estate tax has been repealed in 2010 only; had Steinbrenner died in January (absent the enactment of new legislation), then his estate, which is estimated to exceed $1 billion, would have been subject to a federal estate tax of 55% for all assets in excess of $1 million.

Estate planning experts quoted here speculate that Steinbrenner likely had engaged in various estate planning techniques that would have minimized the estate tax hit had he died in a year when the federal estate tax was in force. I too would be surprised if Steinbrenner hadn't put in place GRATs, sales to Intentionally Defective Grantor Trusts, Charitable Trusts and other planning tools to lessen the estate tax hit. But unless Congress retroactively reinstates an estate tax for 2010 (which appears less likely the further into 2010 we get), then any such advanced planning may prove to have been unnecessary in this instance.