President Obama’s 2014 Budget Proposal Retreats From the “Permanent” Estate Tax Fix to Higher Rates and Lower Exemptions

by Jeff Pirruccello

Pirruccello, Jeffrey
(402) 341-3070

In order to raise an estimated $72 billion over the next ten years, President Obama’s 2014 Budget proposes to lower estate tax exemptions and increase estate tax rates after 2017. The estate and gift tax rates would increase from 40% to 45% and the estate and gift tax exemptions would fall from $5.25 million for each tax to $3.5 million and $1 million, respectively. In addition, the Budget would eliminate indexing the exemptions for inflation.

These changes, along with the Administration’s estate tax reform proposals mentioned below, would overturn the estate tax provisions struck in the January 2013 fiscal cliff deal by Congress and the President. Those commentators who called the deal a “permanent” fix were much mistaken. President Obama’s proposal is a strong reminder that politicians cannot resist changing the tax laws and that there is always uncertainty when it comes to Congress and Presidents’ tax proposals.

The 2014 Budget would also revive other “reform” proposals of the 2013 Budget, including coordinating the income and wealth transfer tax rules applicable to grantor trusts, which would likely inhibit future transfers or installment sales to grantor trusts; require a minimum term of 10 years for grantor retained annuity trusts (GRATs), and limit the terms of dynasty or legacy trusts to 90 years, among other changes. Unlike the rate increase, such reforms would generally apply to transfers made after the proposals are enacted. Fortunately, portability of a decedent’s unused estate and gift tax exemptions to the surviving spouse would be allowed.

Given the fact that President Obama is reopening the debate on the estate and gift tax law, many clients are well advised to address planning in 2013 to avoid the possible enactment of such proposals. Although some believe it is unlikely that this legislation will be enacted in 2013, nothing is certain; and with the magnitude of America’s debt, Congress will be hungry to find more tax revenue.

If you or your client would like to discuss planning to avoid these proposals, do not hesitate to contact a member of the McGrath North tax group.

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