Wednesday, April 10, 2013
As I have previously discussed, Obama's proposal contained aspects that would have limited the amount that a taxpayer can invest in an IRA. Now, it appears that the President's budget might have a few more surprises for estate planners and their clients. While ATRA provided some certainty with regards to the estate tax, there are still several political fights over spending and taxes that could affect how estate planning works. The following tools might be most at risk because the high unified credit.
- GRATs (Grantor Retained Annuity Trusts) is a trust that provides the interest income on the trust property as an annuity payment. When the trust's term ends, the property within the trust distributes to the trust's beneficiaries. The trust is typically funded with assets that are likely to appreciate in value quickly. Because the gift tax rate is locked in at the time the settlor creates the trust, it could potentially allow a client to pass large amounts of wealth and minimize the tax on the transfer. Any appreciated valued incurred after the property is in the trust is non-taxable. The proposal would require a minimum term of 10 years and "would elimiate the possibility that the GRAT could be 'zeroed out.'"
- IDGTs (Intentionally Defective Grantor Trusts) is a type of grantor trust, however, it is no treated as a separate entity for tax purposes. With this type of trust, the client would pay tax "on the appreciated value of the trust assets." Because of this, more money can be transferred to the beneficiaries of the trust. According to Life Health Pro, "President Obama’s proposal would require that gift tax be paid upon any distribution from the IDGT and that any value remaining in the IDGT at the grantor’s death be included in the estate for estate tax purposes." This change would basically eliminate any beneficial use the IDGT has.
- Dynasty Trusts is a generation-skipping transfer (GST) tax-exempt irrevocable trust. Estate planners used this tool to ensure that their clients can use the unified credit to pass their large gifts to future generations without incurring a GST tax. While some states have rule the of perpetuities in place to prevent the indefinite duration of dynasty trusts, some states do not. In states that do not have the rule, an indefinite duration of a dynasty trust can save the settlor from having to pay a great deal of taxes. Not only can the trust assets appreciate without incurring any tax liability, a beneficiary could withdraw the principal in the future and not incur any tax liablity. Obama's budget proposal would place a transfer tax on distributions after the dynasty trust has been in existence in 90 years.
See Robert Bloink and William H. Brynes, Budget Proposal Targets Estate Planning Tools, Life Health Pro, Apr. 8, 2013.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) and Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.