The President’s Budget and the Future of Estate Planning

Earlier this month, President Obama released his 2013 budget. Almost immediately following its release, it was declared “dead on arrival” by Republicans and pundits alike. In many ways, the President expected this and presented the budget to express his ideal approach to government spending and taxation. If the President is reelected in November, it is possible that he will push one or more of these proposals during his second term. It is especially worth noting with regard to how the estate, gift and GST tax systems may be structured in his second term.

While many of the proposals are repeats of the President’s previous proposals, the release of the budget was met with both hyperbole and apathy. To some, it expressed ”a war on the wealthy” while to others, it was ”same thing, different year”. Regardless of your opinion on the proposals, it’s important to recognize the possible changes to estate planning included in the budget. This includes:

Returning the Estate, Gift and GST Tax Exemptions and Rates to 2009 levels-Absent action before the end of the year, the Estate, Gift and GST Tax exemptions will reduce to $1 million and the top rate will increase to 55%. In the President’s budget, he has proposed returning the Estate and GST Tax exemptions to $3.5 million and the top rate to 45%. For the Gift Tax exemption, it would still be $1 million, but top rate would increase from the current 35% to 45%.

Reducing the use of valuation discount on family entities-Wealthy families often use family limited partnerships and family LLCs to pool their assets and allow for centralized management. An additional benefit has been the use of valuation discounts on individual interests in the family entity due to the partner or member lacking control over the underlying assets and being unable to sell their interests on the open market. The IRS has long contested these discounts and the President’s budget indicates his desire to continue pressuring planners to reduce or discontinue the use of these discounts.

Increasing the minimum term of Grantor Retained Annuity Trusts (GRATs) and the elimination of “zeroed out” GRATs-Estate Planners often utilize GRATs to transfer property that is expected to appreciate significantly from a senior family member to a junior family member without paying gift tax (known as a “zeroed out” GRAT). Using shorter term GRATs (a minimum term of two years must be used) have allowed their creators to avoid the risk of the transferred property ending up in their taxable estates. The proposals in the President’s budget would require a minimum term of a GRAT to ten years and would require the creator of the GRAT to make some form of a taxable gift at the time of the GRAT’s creation.

Limiting the term of a Dynasty Trust to 90 years-With many states amending or eliminating their Rules Against Perpetuities, a trust that continues over multiple generations known as a Dynasty Trust have become more popular. Because the assets of a Dynasty Trust remain in trust for multiple generations, the payment of estate taxes can be delayed potentially forever if the grantor the trust continues to have descendants. Under the President’s budget, a dynasty trust would terminate after 90 years and an estate tax would then be due on the assets of the trust.

Eliminate the Gift and Estate Tax benefits of a Grantor Trust-One of the newer proposals included in the budget involved altering the estate and gift tax treatment of grantor trusts. As I previously discussed in an an earlier post, a grantor trust’s income is taxed to the grantor of the trust rather than to the trust itself. Under the proposed changes, this favorable tax treatment for income tax purposes would cause the distributions from the trust and transfers to the trust to be considered taxable gifts. Additionally, when a grantor trust terminates due to the death of a grantor, the assets in the trust would be included in the grantor’s taxable estate.

Will any of these proposals eventually become law? That will depend in large part on the results of this year’s national election. Nevertheless, these proposals are a look into how the estate tax system may change next year if the President wins a second term.

Please contact for more information about Estate and Gift Tax Planning.

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