Feb 21, 2012

Michael Yuen

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Major Family Gifting Faces Headwind if Obama’s Budget Proposal Passes

On February 13th, the Obama Administration released its fiscal year 2013 budget, including various estate tax proposals that, starting in 2013, would result in:

1. Reducing the lifetime gift exemption back to $1M (the 2009 level)
2. Reducing the overall estate tax exemption to $3.5M (the 2009 level)
3. Increasing the top estate tax rate back to 45% (the 2009 level)
4. Making the trust assets in the IDGTs (Intentionally Defective Grantor Trusts) includible in the grantor’s estate
5. Modifying the rules on valuation discounts
6. Requiring a minimum 10-year term on GRATs (Grantor Retained Annuity Trusts)
7. Making permanent the portability (carryover) of unused estate tax exemption amounts between spouses.
8. Limiting the duration of the GST exemption to 90 years

Among the Administration’s various proposals on estate tax law changes, the most damaging one is the proposed reduction of the current lifetime gift exemption of $5M to $1M starting in 2013. Since the beginning of 2011, many wealthy taxpayers have taken advantage of the $5M lifetime gift exemption ($10M per married couple) to make tax-free transfers of wealth downstream to family members, including gifts of cash, securities, real property, and interests in family businesses, using a variety of available estate/gift tax planning techniques that involve trusts. All these major wealth transfers may come to a halt if the Obama proposal gets it way or if Congress does nothing and lets the current law on the $5M lifetime gift exemption expire on December 31, 2012.

Included in the Administration’s 2013 budget, there is also another important estate tax proposal that could be as damaging as the reduction in lifetime gift exemption. The new proposal would change the current estate and gift tax rules as applied to IDGTs – a commonly used estate tax planning technique – and require the trust assets in the IDGTs be includible in the grantor’s estate. Estate planning professionals have been using this technique successfully for many years to help wealthy clients transfer substantial assets out of their estates at a very low transfer tax costs using a combination of low asset valuations, available discounts, and low interest rates. If this proposal gets passed by Congress, it would significantly change the existing approach to estate tax planning.

Individuals who have not taken advantage of the current gifting environment may want to consider doing so before the end of 2012.

For further information, please contact your Aronson tax professional or Michael Yuen of our Estate/Gift/Trust Tax Practice at 301.222.8209.