On January 2, 2013, Congress passed the American Taxpayer Relief Act of 2012, which extended a majority of the “Bush Tax Cuts” and fixed the amount that can be passed free of gift, estate, and generation-skipping tax for 2013 at $5.25 million per person. This amount is set to increase in the future, based on annual cost of living increases.

In his budget proposal for 2014, President Obama proposes to fix the amount that can pass free of tax at the levels which had been allowed in 2009. In other words, there would be a $3.5 million exclusion for estate tax purposes and a $1 million exclusion for gift tax purposes. He also proposes to raise the estate and gift tax rate to 45%. Portability of the unused estate tax exclusion of a deceased spouse, a key provision of the American Taxpayer Relief Act, remains in effect under the President’s proposal. The change would become effective in 2018 and there would be no so-called “claw-back” for those who transferred assets under the existing law.

The Administration’s budget contains a number of other changes: (1) Elimination of the ability to sell assets to a Intentionally Defective Grantor Trust and remove those assets and future appreciation on those assets from the estate; (2) Imposition of a minimum term of ten years when using a Grantor Retained Annuity Trust for estate tax planning; (3) Limiting the valuation discounts for estate tax planning purposes available through Family Limited Partnerships and Family Limited Liability Companies; (4) Limiting a generation-skipping trust to a term of ninety years (eliminating the usefulness of dynasty trust provisions enacted by many states in the past two decades); and (5) Clarifying that the gift tax exclusion for payment for medical care and education costs is for direct payments only and not for payment made through a Health and Education Exclusion Trust (HEET).

Another change proposed by the Administration is to require distributions from an Inherited IRA to a non-spouse beneficiary in no more than five years, effective for IRA owners dying after 2013. This would eliminate the ability to “stretch-out” IRA distributions over the life expectancies of young beneficiaries, such as children or grandchildren. There would be exceptions for disabled, chronically ill, and minor beneficiaries.

There would also be new limits on the amount that can be contributed to retirement plans. If a taxpayer has accumulated retirement benefits in excess of the amount necessary to provide the maximum annuity permitted under a defined benefit plan (currently $205,000 per year payable as a joint and survivor annuity beginning at age 62), the taxpayer would be prohibited from making additional contributions or receiving additional accruals. Currently, this calculation would limit taxpayers to a maximum of approximately $3.4 million at age 62.

Of course, these proposals are only proposed law and would require Congressional action. But, when planning for the future, it is useful to keep in mind the direction the Administration would like to take with taxes.

Our law firm focuses on estate planning, estate and trust administration, estate tax reduction strategies, and estate planning for persons with large retirement assets. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up to date with information regarding the ever-evolving law and regulations dealing with planning an estate and reducing estate and income taxes. You or your clients can get more information about a complimentary review of your clients’ existing estate plans by calling or by visiting our website.

Leave a Reply