Opportune Time for Estate and Gift Planning

Dec

6

Opportune Time for Estate and Gift Planning

The federal estate, gift and generation-skipping transfer (GST) tax rules approved by Congress in December, 2010 are in effect during 2011 and 2012 only.  The Treasury Department announced in February 2011 that President Obama’s 2012 budget proposals presume several important changes in the rules that will take effect on January 1, 2013.  In “General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals,” the Treasury described the changes, to include:

  • Restore the 2009 estate, gift and GST tax rules on January 1, 2013. These would include a top estate, gift and GST tax rate of 45 percent (currently 35%), a $1 million gift tax exclusion (currently $5 million), and a $3.5 million estate and GST basic exclusion amount (currently $5 million);
  • Make permanent the ability of a surviving spouse to use a deceased spouse’s unused exclusion amount;
  • Require consistency in valuation for income and estate tax purposes, so that beneficiaries are required to use estate tax values to determine the adjusted basis of property received from a decedent;
  • Permit the Treasury to issue regulations to ignore in valuing partnerships, LLCs, and other entities, a new category of “disregarded restrictions,” so as to reduce the use of valuation discounts for such entities;
  • Require a minimum ten-year term for grantor retained annuity trusts (GRATs), require a positive value to the remainder interest in a GRAT, and prevent the use of decreasing payments in a GRAT; and
  • Provide that the allocation of GST exemption to a transfer protects that transfer from GST tax for no more than 90 years (as opposed to an unlimited period in states such as Wisconsin that do not have a rule against perpetuities).

These proposals are a long way from becoming law, but they give us an indication of the Treasury Department’s thinking and priorities for transfer tax reform.  If anything, these proposals suggest that 2012 may be an opportune time for clients to consider (i) making lifetime tax-free gifts outright or to creditor-proof trusts for children and grandchildren; (ii) obtaining valuation discounts on transfers of closely-held business interests, (iii) taking advantage of historically low interest rates to create long-term GRATs to shift the future appreciation in value of closely-held business interests tax-free to children and grandchildren, and (iv) creating long-term tax effective and creditor-proof trusts for children and grandchildren.

If you would like to discuss how you could take advantage of any of these planning opportunities in 2011 or 2012, please contact Cassady Schiller.