Fiscal Year 2013 Budget Proposal

On February 13, 2012, President Obama released his fiscal year 2013 budget proposal for the fiscal year beginning October 1, 2012. This budget contains several long-standing proposals – as well as some new ones – that would impact estate planning significantly.  The President’s proposal includes the following:

  • Reinstating 2009 exemption levels – permanently – for the estate, gift and generation-skipping transfer (GST) tax. The maximum tax rate would be 45% (up from the current 35% but lower than the 55% rate scheduled for return on January 1, 2013). The exemption amounts would be $3.5 million for estate tax and GST and $1 million for gift taxes (both down from $5.12 million currently).  The President has also proposed permanent portability for the estate and gift tax exemption.
  • Limiting the GST tax exemption to 90 years. Several states have abolished this limitation such that trusts created under these states’ laws can avoid GST tax indefinitely. This new proposal seeks to eliminate this planning opportunity and impose GST tax after only 90 years regardless of state law.
  • Subjecting “Grantor Trusts” to Estate Tax. This new proposal would be a significant departure from current law, under which transfers to a grantor trust subject the trust maker to income tax on trust income but allow trust assets to grow free of estate tax. This new proposal would subject grantor trust assets to estate tax as well.
  • Minimum 10-Year Term for GRATs.  This repeat proposal would create a minimum 10-year term for grantor retained annuity trusts (GRATs), with a maximum term being the life expectancy of the annuitant plus 10 years.

The President’s proposal also seeks consistency in valuation for transfer and income tax purposes as well as modification in the valuation discount rules.It’s difficult to say which if any of these proposals will become law but it is another reminder that the current status quo will likely be changing as the 2010 law is set to sunset or expire at the end of this year.  You should be considering whether one or more current strategies should be used in your planning while still available.A full copy of the President’s budget is available for download at http://www.whitehouse.gov/omb/budget/Overview.Treasury Department’s analysis of the President’s fiscal budget proposals, the so-called “Green Book,” is available for download at http://www.treasury.gov/resource-center/tax-policy/Pages/general_explanation.aspx.