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Obama's Fiscal Year 2013 Budget Proposal

Posted on: March 5th, 2012
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. Overall, the proposal attacks several tried and true planning strategies and would scale back the exemptions under current law. The President's proposal includes the following:

Reinstating 2009 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 scheduled to return to 55% on January 1, 2013). The estate tax and GST exemption amounts would be $3.5 million, $1 million for gift taxes (both down from $5.12 million currently but scheduled to return to $1 million on January 1, 2013). The President 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 (taxed at the maximum estate tax rate) indefinitely. This new proposal seeks to eliminate this significant planning opportunity and impose GST tax after only 90 years.

Subjecting 'Grantor Trusts' to Estate Tax. This new proposal would be a significant departure from current law, under which transfers to a grantor trust (i.e., a trust containing certain provisions set forth by Congress) 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.

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 overall they follow the government's general trend of restricting estate planning opportunities rather than broadening them. Thus, individuals would be well served to meet with their estate planning attorney to determine if they should implement one or more of these strategies while they still can.

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.
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