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What Lies Ahead for Gift and Estate Tax Laws

Believe it or not, the gift and estate tax laws are back on the legislative radar again.

As you may know from our seminars earlier this year in Louisville, Lexington and Pikeville, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 made significant changes in December 2010 to the Estate, Gift and Generation Skipping Transfer (GST) Tax laws. Overall these changes were very helpful, and many commentators felt that this 2010 Tax Act was a “home run.” However, the downside is that these changes are only in effect until December 31, 2012, after which the tax laws revert back to their pre-2001 provisions.

The glaring question is what, if anything, will Congress and President Obama do in the meantime to provide some better tax laws for 2013 and later years?

Recently President Obama released his Budget Proposal for the 2012 fiscal year. This Budget Proposal discusses changes to the Estate, Gift and GST tax laws, and provides insight as to what changes the President would like in these areas. Included in the Budget Proposal are the following:

  1. Reducing the estate and GST tax exclusion/exemption amounts to $3.5 million, which was their level in 2009. The 2010 Tax Act contained a $5 million estate tax exclusion and GST tax exemption.

  2. Raising the top estate, gift and GST tax rate to 45%, which was the top tax rate in 2009. Currently the tax rate for these three taxes is a flat 35%.

  3. Reinstating the $1 million lifetime gift tax exclusion. The 2010 Tax Act contained a $5 million lifetime gift tax exemption, which unified the estate and gift tax exemption amounts.

  4. Making the portability of the deceased spouse’s unused tax exclusion amount to the surviving spouse permanent. Portability was included in the 2010 Tax Act and is widely considered to be one of its best features. This is very encouraging, and gives hope that portability of the unused exclusion amount will not be taken away after 2012.

  5. Limiting the ability to obtain valuation discounts on family limited partnerships and limited liability companies. The proposal would use regulations under Code Section 2704(b) to expand the IRS’ ability to disregard the items and restrictions that are often used in obtaining discounts on these closely held businesses.

  6. Requiring a minimum 10 year term for all Grantor Retained Annuity Trusts (GRATs). Currently, a GRAT may have a term as short as two years.

  7. Restricting the time period for which GST Exemption is applicable to 90 years. This proposal means that any Trust which is fully exempt from GST taxes would only be able to enjoy that exemption for 90 years after the exemption is allocated. This proposal is meant to limit the ability of individuals establishing perpetual dynasty trusts, which currently can be made exempt from GST and estate tax for all future generations, far beyond 90 years. At the end of 90 years, the GST exemption would essentially be eliminated by this proposal, and any subsequent distributions from the trust after that date would be fully subject to the GST tax.

Stay tuned for further Legislative action in this important tax arena.

To learn more about Jeremy P. Gerch and his practice, visit his profile.

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