The Impermanence of Permanent Tax Changes

   While Congress may never pass many (or any) of President Obama’s 2014 Budget Proposals, there are a number of proposals in the President’s plan that would affect estate planning and bear watching. 

     The 2014 budget includes a proposal to restore the estate, gift, and generation-skipping tax (GST) rates and exemptions to their 2009 levels beginning in 2018. This would result in a top estate and gift tax rate and GST tax rate of 45 %, a $3.5 million estate tax applicable exclusion amount and GST exemption, and a $1 million gift tax exemption. 

     Another provision would require that all grantor retained annuity trusts (GRATs) have a minimum term of 10 years and some remainder value at the end of the term. This would greatly reduce the value of using a GRAT to pass value (including income) to other family members prior to death. 

     One proposal would affect the use of grantor trusts to transfer value and appreciation to other generations by treating as an incomplete transfer for gift and estate tax purposes a sale or exchange of property to a grantor trust deemed owned by the seller. 

     A fourth provision would limit using the GST exemption from the generation-skipping tax to a maximum of 90 years, where currently the protection is in perpetuity. Practically speaking this may not have much effect on the planning of most taxpayers but it is a significant theoretical cut back of protection. 

Other proposed provisions include: 

1. Requiring non-spouse beneficiaries of a decedent's IRA or retirement plan to take inherited distributions over no more than five years.
2. Limiting the amounts that can be contributed or accumulated within an IRA or qualified retirement plan to the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan (currently $205,000).
3. Requiring that basis of property received by gift or from a decedent be determined consistently with the applicable gift or estate tax return. Currently there is no requirement that the recipient of a gift or bequest use the same value as that given to the gift or bequest under the applicable gift or estate tax return. For example, if the donor of the gift used a discounted value for gift tax purposes, the beneficiary can arguably use the full value of the asset in determining the basis and taxability for a sale of the asset.
4. Specifying that the GST exclusion for payments of medical and tuition costs applies only to direct payments by a donor to the provider of medical care or to the school in payment of tuition, and not to trust distributions. 

     While none of these proposals may find their way into estate planning law, they are a clear indication of the "impermanence" of the new "permanent estate tax law" passed late last year. It is important to be vigilant in reviewing what changes are possible and determine what steps might need to be taken to protect our clients.

Alan Ferrara