1st Jul 2011

As discussed in the January 2011 Newsletter, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) applies to the estates of decedents through 2012.  As a first step towards progress beyond 2012, President Obama’s proposed budget includes several provisions relating to the Federal Estate, Gift and Generation Skipping Transfer (GST) Taxes.


The Act increased the Federal Estate Tax exemption to $5 million per individual and set a maximum Estate Tax rate of 35% for the estates of decedents dying in 2011 and 2012.  The proposed budget would decrease the exemption to $3.5 million and increase the maximum Estate Tax rate to 45%.  Of course, this could be considered an increase from the $1 million exemption which the Estate Tax would default to in 2013 without Congressional action.

Additionally, the Gift and GST exemptions were raised to $5 million as well for 2011 and 2012 by the Act, which made lifetime planning much simpler since an individual’s entire Estate Tax exemption could be used during his or her life.  However, the proposed budget would reduce these exemptions to $1 million and would also raise the maximum Gift and GST Tax rates to 45%.


The Act also introduced portability of the Estate Tax exemption between spouses, which would allow the surviving spouse to apply the remaining Estate Tax exemption of the deceased spouse to his or her own estate.  While portability could allow great flexibility in planning, the uncertainty of its future beyond 2012 makes the flexibility difficult to utilize.  The proposed budget includes a provision that would make portability permanent.  Most estate and financial planners would agree that any stability in this area would be considered progress.

Valuation Discounts

Through the use of Family Limited Partnerships and Limited Liability Companies, individuals and families have been able to pass interests in their assets to their descendants at a discounted rate by applying discounts for lack of marketability and minority interest.  Through litigation, the IRS has long battled such discounts, often successfully, by arguing that many of these entities do not operate a legitimate business and serve no purpose other than tax reduction. President Obama’s proposed budget would create a category of “disregarded restrictions” that would be ignored in valuing property for Estate and Gift Tax purposes, limiting the use of family entities as a conduit for transferring discounted ownership interests down the family tree.

Minimum GRAT Term

A minimum term for Grantor Retained Annuity Trusts (GRATs) has been a topic of discussion for several years.  In order to be successful, the grantor of a GRAT must outlive the term of the GRAT.  One technique for planning with GRATs is to use “rolling” GRATs—multiple, successive GRATs with short terms of two or three years—rather than a single GRAT with a longer term.  By doing so, the chances of the grantor surviving at least some of the GRATs are increased.  The proposed budget would impose a minimum term of ten years on all GRATs, thus limiting their use in Estate and Gift Planning.

Maximum GST Term

Most states have either repealed or allow for opting out of the rule against perpetuities—a rule that forbids perpetual trusts.  Thus, by opting out of Illinois’ rule against perpetuities, an individual could theoretically create a trust for his or her descendants that would last forever.  However, the proposed budget would limit GST trusts to a maximum of 90 years.

Of course, Republicans and Democrats will battle over these proposals in the months to come, but based on the provision of his proposed budget, it appears that President Obama is determined to tighten the screws on lifetime transfers.

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