The President’s proposed budget for 2013, issued this week, would permanently restore the estate tax rates to those that were in effect in 2009 and restrict some popular strategies used to shift assets to future generations.
Below is a break down of the proposed estate and gift tax changes:
Restoration of 2009 levels. The estate, generation-skipping transfer (GST), and gift tax parameters from 2009 would be made permanent with a top tax rate of 45% and the exclusion amount at $3.5 million for estate and GST taxes, and $1 million for gift taxes. These changes would apply for estates of decedents dying, and for transfers made, after Dec. 31, 2012.
Portable estate tax exclusion made permanent. The provision allowing a surviving spouse to use the deceased spouse’s unused estate tax exclusion, which expires for decedents dying after Dec. 31, 2012, would be made permanent.
Basis consistency and reporting requirement for donated and inherited property. The basis of property in the hands of the recipient could be no greater than the value of that property as determined for estate or gift tax purposes (subject to subsequent adjustments). A reporting requirement would be imposed on executors and donors to provide the necessary valuation and basis information to both the recipient and IRS. These rules would apply for transfers on or after the enactment date.
Toughened rules for valuation discounts. Certain additional restrictions (“disregarded restrictions”) would be ignored under Code Sec. 2704 in valuing an interest in a family-controlled entity transferred to a member of the family if, after the transfer, the restriction will lapse or may be removed by the transferor and/or the transferor’s family. The transferred interest would be valued by substituting for the disregarded restrictions certain assumptions to be specified in regs. These rules would apply to transfers after the enactment date of property subject to restrictions created after Oct. 8, 1990 (the effective date of Code Sec. 2704)
Minimum and maximum term for grantor retained annuity trusts (GRATs). A GRAT would be required to have a minimum term of ten years and a maximum term of the life expectancy of the annuitant plus ten years. Also, the remainder interest would have to have a value greater than zero at the time the interest is created and any decrease in the annuity during the GRAT term would be prohibited. These rules would apply to trusts created after the enactment date.
Duration of GST tax exemption limited. On the 90th anniversary of the creation of a trust, the GST exclusion allocated to the trust would terminate. This rule would apply to trusts created after the enactment date, and to the portion of a preexisting trust attributable to additions to such a trust made after that date.
Coordination of income and transfer tax rules applicable to grantor trusts. The current lack of coordination between the income and transfer tax rules applicable to a grantor trust creates opportunities to structure transactions between the deemed owner and the trust that can result in the transfer of significant wealth by the deemed owner without transfer tax consequences. New rules for grantor trusts would prevent this by: (1) including the assets of the trust in the grantors’ gross estate of that grantor for estate tax purposes, (2) subjecting to gift tax any distribution from the trust to one or more beneficiaries during the grantor’s life, and (3) subjecting to gift tax the remaining trust assets at any time during the grantor’s life if the grantor ceases to be treated as an owner of the trust for income tax purposes. These rules would apply for trusts created on or after the enactment date and with regard to any portion of a pre-enactment trust attributable to a contribution made on or after the enactment date.
Extension of estate tax lien on Code Sec. 6166 deferrals. The estate tax lien under Code Sec. 6324(a)(1) would be extended to apply throughout the Code Sec. 6166 deferral period, effective for estates of decedents dying on or after the effective date and for estates of decedents dying before the enactment date as to which the current law Code Sec. 6324(a)(1) lien period had not expired on the effective date.