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.