Obama's Budget Proposal Part I

Obama's budget proposal was recently released, and here are some of the proposed changes that involve estate planning. Three of the provisions are listed below, and three more provisions will be discussed shortly: 

Restore the Estate, Gift, and Generation-Skipping Transfer Tax (GST) parameters in effect in 2009.

Currently: Until the end of 2012, the estate, GST, and the gift tax rate is 35% and each individual has a lifetime exclusion for each of these up to $5 million. The surviving spouse may be able to increase his/her exclusion amount by the amount of the deceased’s spouse’s unused exclusion at death. 

Proposed Change: Obama is concerned about the substantial tax cut that affluent taxpayers received from the Tax Relief, Unemployment, Insurance Reauthorization and Job Creation Act provisions. His proposal is aimed at a fair, permanent estate tax law. He suggests that the estate, GST, and gift tax parameters that existed in 2009 be reinstated permanently.  The top tax rate would be 45% and the exclusion amount would decrease to $3.5 million for estate and GST taxes and go down to $1 million for gift taxes. The portability of unused estate and gift tax exclusion would be made permanent.

Require Consistency in Value for Transfer and Income Tax Purposes

Currently: According to Section 1014, the basis of property acquired from a decedent is generally the fair market value of the property on the decedent’s date of death. For estate tax purposes, property included in the decedent’s gross estate is valued by the same measure. Current law does not require that the recipient’s basis in that property be the same as the value reported for estate tax purposes. Section 1015 dictates that the donee’s basis in the gifted property is the donor’s adjusted basis in the property, increased by gift tax paid on the transfer. If the donor’s basis is greater than the fair market value of the property when the gift is given though, the donee’s basis is the fair market value when the gift was given to determine if there was any subsequent loss.

Section 1022 is applicable to the estates of decedents who died in 2010 and taxpayers can elect for the the basis of property acquired from a decedent who died in 2010 to be the lesser of the fair market value of the property on the decedent’s date of death or the decedent's adjusted basis in that property if increased by the additional basis.

Proposed Change: Obama wants to make a change because he says that taxpayers should take a consistent position in dealing with the IRS. He proposes a consistency and a reporting requirement that would require that the basis in property that is received from a decedent must equal the value of that property for estate tax purposes. The basis of property for one to whom section 1022 is applicable, is the basis of that property, including any additional basis allocated by the executor.

The reporting requirement would be imposed on the executor of the decedent’s estate and on the donor of a lifetime gift. They would have to give valuation and basis information to the IRS and to the recipient of the gift. 

Modify Rules on Valuation Discounts

Currently: Fair market value of property that is transferred is subject to estate or gift tax at the time of the transfer. Section 2704(b) provides that certain restrictions are not to be taken into account when valuing interests in family-controlled entities if those interests are transferred to or for the benefit of family members. Applying those special rules increases the transfer tax value of the interests above the price a willing buyer would pay.

Proposed Change: Judicial decisions and new statutes in most states have made section 2704 inapplicable. Obama’s proposal will create more restrictions that will be ignored in valuing an interest in a family-controlled entity transferred to a member of the family if the restriction will lapse or may be removed by the transferor after the transfer. 

More updates on his budget proposal will follow in the next blog post.