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President's Budget Proposal Impacts Estate Planning

President Obama unveiled his budget proposal for fiscal year 2013 on February 13, 2012. The proposal includes the following provisions which would affect estate planning:

  1. The Administration proposes to permanently extend estate, gift and GST tax parameters as they applied in 2009 for transfers post-December 31, 2012. Specifically, the maximum estate, gift and GST tax rates would be 45%, the estate and GST exemption amounts would be $3.5 Million, and the life-time gift tax exclusion amount would be $1,000,000.
  2. The portability of unused estate and gift exclusion amounts between spouses would be made permanent and would apply to decedents dying after December 31, 2012.
  3. For decedents dying and gifts made after enactment, the recipient's basis generally must equal the value of the property as determined for estate or gift tax purposes. A reporting requirement will be imposed on the Personal Representative or donor to provide the necessary information to both the recipient and the IRS.
  4. The proposal includes a modification of the rules on valuation discounts. It proposes to create an additional category of "disregarded restrictions" which would otherwise be taken into consideration when justifying discounts for lack of marketability and control. Those interests would be valued instead by assuming the applicability of certain assumptions. The disregarded restrictions would include limitations on a holder's right to liquidate his/her interest that are more restrictive than a standard to be identified in regulations, and any limitation on a transferee's ability to be admitted as a full partner or holder of an equity interest in the entity. This proposal would apply to transfers of property subject to restrictions created after October 8, 1990 (the effective date of IRC section 2704).
  5. The proposal includes a requirement that a 10 year minimum and a max of life-expectancy plus 10 year term for GRATs created after the enactment date.
  6. It would limit the duration of GST tax exemption by imposing a bright-line test that would in effect terminate the GST tax exclusion on the 90th anniversary of the creation of the trust.
  7. The President's proposal includes the coordination of certain income and transfer tax rules applicable to grantor trusts. Specifically, to the extent that a grantor of a trust is deemed to be an owner for income tax purposes, the trust's assets would be included in the grantor's gross taxable estate for estate tax provisions and would be subject to gift tax at any time during grantor's lifetime when the grantor ceases to be treated as an owner for income tax purposes. The proposal does not grandfather any trusts.
  8. Extend the lien on estate tax deferrals provided under IRC section 6166.

You can contact Esther A. Streete regarding the status of the estate tax law and its impact on your estate plan. She can be reached at 410-266-9909 Ext. 316