I saw the following in Stephen Leimberg’s Estate Planning Newsletter. This week’s issue written by Marty Shenkman and Bob Keebler who are well known national experts on tax law. I will quote Mr. Shenkman and Mr. Keebler’s words and then provide a couple of points below that as my added commentary:
“Likely Changes to the Current Estate and Gift Tax Laws:
- The estate and gift tax exemption may decline. While the law provides for a $1 million exemption in 2013, President Obama has proposed a $3.5 million exemption. However, the gift tax exemption is unsettled and may be only $1,000,000.
- The generation-skipping transfer (GST) tax exemption is scheduled to decline to $1 million inflation indexed in 2013, but again President Obama has proposed a $3.5 million exemption.
- The estate, gift and GST rate is scheduled to increase from the current 35% to 55%, but President Obama has proposed a 45% rate.
- Grantor retained annuity trusts (“GRATs”) may be required to use a 10 year minimum term. This will substantially increase the mortality risk for using GRATs making the technique ineffectual for older taxpayers. Numerous bills to restrict GRATs were proposed previously. For example, the House of Representatives passed the Small Business and Infrastructure Jobs Tax Act of 2010 on March 24 (H.R. 4849). Changes may be patterned after this or other prior proposals.
- Grantor trusts have been proposed to be included in the grantor’s estate; however existing grantor trusts will be grandfathered in.
- Portability of the estate tax exemption is set to expire in 2013. However, President Obama has proposed that it be made permanent. Regardless of what happens to portability it seems to be the consensus of most tax advisers that the shortcomings of portability generally make it only a technique to rely upon when better proactive planning was not pursued, or in a limited number of other circumstances.
- Valuation discounts have been proposed for restriction or repeal numerous times. This may be another avenue of raising revenues on the wealthy. For example, Code Section 2704(b) provides that valuation restrictions which are more restrictive than state law should be ignored. State laws have been intentionally changed, e.g. Nevada, undermining the intent of this provision by incorporating into state law the restrictions that support valuation discounts. This might be viewed as a loophole appropriate to close. Other anti-FLP provisions might mandate that certain restrictions be ignored. This could include certain categories of restrictions, such as the lack of a definite term in an agreement, the creation by transfer of only an assignee interest, inability to withdraw capital, and so forth. Lock in features might be ignored
- Restrictions to multi-generational dynasty trusts could be significant if President Obama’s proposal to limit the allocation of GST exemption to 90 years is enacted.
- Other restrictions to intra-family transfers may be proposed.
The collective effect of several, or perhaps all of these types of changes, could change the face of estate planning in a profound manner. The effective date could wreak havoc with 2012 planning that may still be in process if changes are enacted before year end. We may wake-up on January 1, 2013 to find an empty estate planners toolbox.”
A lot of the above is self-explanatory I think. The tax exemption will likely be lower, tax rates likely higher and planning is important. However, focus on a couple of the above shows that the government is cutting into the planning options for the wealthy but they will likely be grandfathered in. This tells me you need to plan NOW. The loss, or restrictions, on valuation discounts could be huge for families utilizing planning vehicles like the Family Limited Partnership (or family LLC). Likewise the restriction on avoidance of the generation skipping tax could be huge down the road. It’s not likely to have a large impact during our lifetime but future generations will notice a difference Thus, the wealthiest of us need to be taking action NOW! Not next week or next month but TODAY! Call you estate planning attorney right now and get your planning started!