The President’s 2013 Budget Proposal: Bad News for Wealth Transfer Planning

The key points of the President’s 2013 Budget Proposal are as follows:

1.       The estate tax rate would increase to 45% (from today’s 40% rate).
2.       The gift tax exemption would be reduced to $1,000,000 (from today’s 5,250,000).
3.       The estate tax and GST exemptions would be reduced to $3,500,000 (from today’s 5,250,000).
4.       The GST period would be limited to 90 years (from today’s unlimited period) depending on state law.  What this means that wealth must be subject to estate taxes at least once every 90 years.
5.       The IDGT trust transactions will be eliminated on a prospective basis.  What this means is that selling assets to a trust that is the alter ego of the seller will be prohibited.
6.       The GRAT transaction will be eliminated on a prospective basis.  i.e. There will be no zeroing out GRATs, and all GRATs must have at least a 10 year term.
7.       A Buffet rule would impact income greater than $1,000,000 (at a minimum rate of 30%).
8.       Itemized deductions would be reduced to a credit for those with income greater than $250,000.
9.       Carried Interests capital gain treatment would be eliminated.
10.     A special provision would eliminate the ability to retain more than approximately $3,400,000 in an IRA or pension plan.
11.     Current and existing transactions and trusts would be grandfathered.

The  end result is that if any of these rules are likely to be enacted, it will be prudent to act before the end of this year to make sure all in place wealth transfer planning does not need to be adjusted/reformed/decanted AND any significant wealth transfer planning should be implemented before any of these provisions are enacted into law.