Remember When the Federal Estate Tax of $5 Million Was Deemed “Permanent”? Maybe the Definition of Permanent Has Changed!


If you haven’t yet heard, on Wednesday, April 10, the Obama Administration released its proposed budget for fiscal year 2014 (October 1, 2013-September 30, 2014).  The budget contains an anticipated mix of old propositions and new proposals aimed at tightening restrictions on estate planning measures, specifically when it comes to retirement planning.  Below are a few highlights of the budget.  Keep in mind; this is a “budget proposal”.  This proposal will be poked, prodded, amended, re-amended and, ultimately, there will be sweeping changes before anything is passed by Congress.  Think of this as a warning that these ideas are out there raising the possibility that at some point, these concepts could be put in place.

Federal Gift and Estate Tax Reform

In January of 2013, with the passage of the American Taxpayer Relief Act of 2012 (ATRA), Congress made “permanent” the Federal estate and gift tax of $5 million, indexed for inflation, and allowed surviving spouses the permanent option to claim portability on any unused exemption of their spouse.  Did we really think that “permanent” meant “permanent”?  Just three months later, the proposed budget recommends a return to the 2009 Federal estate tax exemption of $3.5 million and a 45% top tax rate.  However, portability remains permanent.  This transition however would not be implemented until 2018, which, in some respects would lead to prolonged uncertainty regarding whether or not such change will actually occur.

In addition to the Federal estate tax reform, the new budget decouples the Federal gift tax from the Federal estate and generation skipping transfer taxes, lowering the lifetime gift tax exemption to $1 million.  Thus, those individuals who considered making large lifetime gifts at the end of 2012 and did not may want to revisit such plans in the face of what may be dramatic Federal estate and gift tax reforms.

A few other highlights regarding Federal estate and gift tax include:

  • Estate and Income Tax valuations must be consistent (i.e. you would no longer be able to discount interests on the estate tax return but use a step-up basis and increase interest on income tax return…it would all need to be equal).
  • GRAT’s (Grantor Retained Annuity Trusts) would now have a minimum term of 10 years and a maximum term of 10 years following the date of death of the grantor.
  • New budget would require non-spouse beneficiaries to liquidate IRA accounts within 5 years of death of the account holder, thus eliminating opportunity to stretch the required distributions over their own life expectancy. Limited exceptions for stretch IRA provisions would apply for disabled children, minor children who fall under 5-year distribution rule upon attaining the age of majority and beneficiaries within 10 years of age of the decedent.

Retirement Asset Reform

Another hot topic of conversation in the budget proposal is the proposed asset cap of approximately $3 million on tax-preferred retirement accounts, individual retirement accounts and other tax-preferred savings.  How it works is that an individual is limited to the amount needed by a 62-year-old to buy an annuity generating an annual payment of $205,000 per year in retirement, or about $3 million for someone retiring in 2013.  This cap will not be retroactive, but it will limit or negate future contributions for those individuals who are over the cap.  The goal of course is to limit tax deferral and subject more wealth to income taxes to help eliminate the current deficit.

What do these changes mean for you?  Contact us to diagnose your estate in light of the possible changes.  Keep an eye on how Congress reacts, change may be coming!

–  Adam Abramowitz, Esq.

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