We all should realize that the federal estate tax is in a state of flux. The current rules, with the generous $5 million individual exemption ($10 million for a couple), expire at the end of 2012. Last month, the Treasury Department released the “General Explanations of the Administration's Fiscal Year 2012 Revenue Proposals,” also known as the “Greenbook.” The Greenbook reveals that the Obama Administration intends to make some big estate tax changes.
- Return the Gift, Estate, and Generation-Skipping Transfer (GST) taxes to 2009 levels. The Greenbook proposes that in 2013 the exemptions return to $3.5 million for the estate tax, $1 million for the gift tax, and slightly over $1 million (reflecting inflation adjustments since 1999) for the generation skipping transfer (“GST”) tax.
- Make portability permanent. Portability is the ability of the first spouse’s estate exemptions to be passed on to the surviving spouse, essentially doubling the estate exemptions for couples while cutting down on the stress of so many trusts.
- Limitations on the use of valuation discounts. Although the IRS has long had defenses in place against attempts to reduce the value of the taxable portion of an estate, Chapter 14 of the tax code, the effectiveness of these defenses have been challenged in a number of ways and part of the proposal is to strengthen Chapter 14 by significantly hampering any effort to receive a valuation discount.
- Impose a ten-year minimum term on GRATs. Grantor retained annuity trusts (“GRATs”) have become extremely popular estate planning vehicles over the past several years. Among other reasons, they are relatively low cost to implement, are fairly low risk, and can transfer significant amounts of wealth to lower generations with virtually no estate or gift tax, often without using any of the transferor’s exemption. One requirement for a successful GRAT, however, is that the grantor must survive the term, otherwise the trust “fails.” To minimize risk, estate lawyers usually use a series of short-term (e.g., three-year) GRATs in their planning. The proposal is to require a term of no less than 10 years. This proposal would apply to GRATs created after the date of enactment, and has been made several times in the past.
- Limiting the capacity of Dynasty Trusts. Under current law in many states, a Dynasty Trust can be established to transfer wealth across generations and exist for that purpose “in perpetuity.” The Obama proposal would provide that, on the 90th anniversary of the creation of a trust, the Generation-Skipping Tax (GST) exclusion allotted to the trust would terminate. This proposal would apply to trusts created after enactment, and to the portion of a pre-existing trust attributable to additions made after the date.
Many of these proposals have been made before, and most arelikely to face stiff opposition.
In addition, Massachusetts will assess a state tax on estates over $1 million. Without proper planning a married couple will have only $1 million between them. See a lawer to be sure that you and your spouse get the $2 million exemption available to you.
Also, Massachusetts clients and taxpayers need to watch out for estate plans created based on maximum federal applicable exclusion planning, common for many estate plans prior to 2003. Now with the $5 million federal exempt amount, there could be a COMPLETELY AVOIDABLE Massachusetts estate tax triggered at the first death. The cost to your spouse and family could be as much as $400,000 in unnecessary estate taxes.
The point of all of this is that the “death tax” is not dead. The current law, with its generous exemptions, could be the calm before the storm. A wise planner would move sooner rather than later to preserve estate assets for future generations.
You can learn more about comprehensive estate planning by attending one of our Trust, Estate & Asset Protection Workshops and also by downloading our Unique Self-Guided 19-Point Trust, Estate & Asset Protection Legal Guide on our website. Once you become a client, we have a Lifetime Protection Program to ensure that your planning stays up to date with the changes in law, fincial, health and family situations.