In light of the pressing need to find new sources of revenue, speculation was swirling that the Super Committee propose legislation to reduce the $5 million federal gift tax exemption to the $1 million 2009 levels before the end of 2012 (even as early as the Nov. 23, 2011, the deadline for the Super Committee to issue its proposal).
However, on Nov. 21, the Super Committee Co-Chairs, Congressman Jeb Hensarling (R-Texas) and Senator Patty Murray (D-Wash.), issued the following joint statement:
“After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline. Despite our inability to bridge the committee’s significant differences, we end this process united in our belief that the nation's fiscal crisis must be addressed and that we cannot leave it for the next generation to solve. We remain hopeful that Congress can build on this committee’s work and can find a way to tackle this issue in a way that works for the American people and our economy.”
Pursuant to The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the 2010 Act) increased gift, estate and generation-skipping transfer (GST) tax exclusion amounts to $5 million for 2011 and 2012, with top tax rates of 35 percent. The $5 million amount is indexed for inflation in 2012, when it will rise to $5.12 million.
In light of the failure of the Super Committee to come to an agreement, the increased exemption amounts aren’t currently set to expire until Jan. 1, 2013, when the exemption amounts are slated to be reduced to $1 million,1 with top tax rates of 55 percent.
If nothing else, the rumors circulating about accelerating the reduction in exclusion amounts and increasing the tax rates focused attention on the fact that the opportunity to transfer up to $10 million of wealth (per couple) free of all transfer taxes has a very limited window.
Moreover, in light of the uncertain political and economic climate, there’s no guarantee that the increased exemption amounts will be available through the end of 2012. Accordingly, clients wishing to use the historically high exemption amounts should take advantage of gifting opportunities as soon as possible.
Sensible Estate Tax Act of 2011
On Nov 17, 2011, Congressman Jim McDermott (D-Wash.), a senior member of the House Ways and Means Committee, introduced HR 3467 the “Sensible Estate Tax Act of 2011.
According to a release by Congressman McDermott, the bill is the first estate tax reform proposal introduced by a member of the tax-writing committee that doesn’t simply extend or repeal the existing estate tax law.
In addition to making changes to the estate tax, the bill includes many of the proposals that appeared in the Administration’s 2012 Fiscal Year Proposals, released on Feb. 14, 2011. Highlights of the bill include:
Reduced estate tax exclusion amount. The bill reduces the estate tax exclusion amount to $1 million for decedents dying after Dec. 31, 2011. The $1 million exclusion amount would be indexed for inflation from 2000 for decedents dying after 2012. The top estate tax rate would be 55 percent, and the graduated amounts subject to the rate schedule would also be indexed for inflation.
The bill includes provisions designed to coordinate with the gift tax to reflect the decrease in the applicable credit amount.
Permanent portability. The 2010 Act allows portability of estate and gift tax exemptions between spouses. However, portability under the 2010 Act applies only through Dec. 31, 2012.
In addition to eliminating the portability sunset, the bill would make a technical correction in the definition of “deceased spousal unused exclusion amount” (DSUEA) of a surviving spouse. Pursuant to the bill, the reference to the basic exclusion amount of the last deceased spouse of the surviving spouse would be replaced with a reference to the applicable exclusion amount of the last deceased spouse, so that the statute would reflect the calculation of the DSUEA as described by the Joint Committee on Taxation.
Restored credit for state death taxes. The bill would restore the credit for state transfer taxes. The credit was phased out beginning in 2002 and completed in 2005. Prior to the phase out, many states had estate tax regimes in effect that allowed them to “pick up” the amounts allowable as a federal estate tax credit. This permitted the states to share in estate tax collections without increasing the totality of the estate tax burden. The bill would restore the revenue sharing mechanism with the states.
Modified rules on valuation discounts and minority interest discounts. The proposal includes valuation rules for certain transfers of “nonbusiness assets” (defined as an asset which isn’t used in the active conduct of one or more trades or businesses), including:
· in the case of the transfer of an interest in an entity which isn’t actively traded, no valuation discount would be allowed with respect to “nonbusiness assets;”
· in the case of the transfer of an interest in an entity which isn’t actively traded, no discount would be allowed by reason of the fact that the transferee doesn’t have control of the entity if the transferee and the transferee’s family members have control of the entity.
The proposal applies to transfers after the date of enactment.
Consistency in value for transfer and income tax purposes. The proposal would impose a consistency and a reporting requirement, with penalties imposed for inconsistent basis reporting. For example, the basis of property acquired from a decedent pursuant to Internal Revenue Code (IRC) Section 1014 must equal the value of that property for estate tax purposes, and the basis of property received by gift must equal the donor’s basis determined under IRC Section 1015.
The proposal applies to transfers for which returns are filed after the date of enactment.
Imposition of restrictions to grantor retained annuity trusts (GRATs). The proposal requires that:
1. a GRAT have a minimum 10-year term;
2. the annuity payment not be reduced from one year to the next during the first 10 years of the GRAT term; and
3. the remainder interest at the time of the transfer have “a value greater than zero.”
The bill contains no guidance regarding the parameters of the “greater than zero” requirement.
The proposal applies to transfers made after the date of enactment.
Limited duration of GST tax exemption. The proposal provides for the expiration of the GST tax exemption 90 years after the establishment of a trust. Specifically, this would be achieved by increasing to one the inclusion ratio with respect to property transferred after that date.
The proposal applies to trusts created after enactment and to transfers made from pre-existing trusts if the transfer is made out of corpus added to the trust after the date of enactment (subject to grandfathering exceptions).
What to Think About?
In light of the quest to find new sources of revenue and looming changes to the estate and gift tax regimes, clients are well advised to focus on estate planning now to make optimum use of current planning opportunities. Accordingly, even though the Super Committee failed to reach a much speculated upon agreement, your clients should consider the following:
· If your client was planning on using the increased $5 million gift tax exemption before the end of 2012, he should consider the advisability of using the historically high exemption amount as soon as possible.2 With Internal Revenue Service interest rates at historic lows, integrating planning techniques that leverage low rates to maximize transfer tax savings are particularly compelling;
· If your client was considering pre-sale business planning, he should consider accelerating planning to take advantage of leverage techniques such as GRATs,3 sales to irrevocable grantor trusts and family transfer discounting in conjunction with the historically high $5 million gift tax exemption and historically low interest rate environment; and
· Your client should consider reviewing his current estate plans in view of possible and impending changes in the law.
Endnotes
1. The generation-skipping transfer tax exemption amount will be indexed for inflation.
2. “Clawback” considerations for gifts made in 2011 or 2012 in excess of $1 million might factor into the analysis
3. There’s some concern that changes to curtail the GRAT technique could have retroactive effect.
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, please be advised that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
This material is written by Lazard Wealth Management LLC for general informational purposes only and does not represent our legal advice as to any particular set of facts and does not convey legal, accounting, tax or other professional advice of any kind; nor does it represent any undertaking to keep recipients advised of all relevant legal and regulatory developments. The application and impact of relevant laws will vary from jurisdiction to jurisdiction and should be based on information from professional advisors. Information and opinions presented have been obtained or derived from sources believed by Lazard Wealth Management LLC to be reliable. Lazard Wealth Management LLC makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the date of this presentation and are subject to change.