President Obama's Budget Proposal: What's Ahead for the Estate Tax?

By Teresa Ambord

In a tough economy, it's not likely that any fiscal changes will be met with cheers, and the $3.78 trillion budget proposed by President Obama on April 10 was no exception. His plan seeks to trim the deficit by $1.8 trillion over the next decade, leaning heavily on high-income earners to fill the gaps. It predictably brought concerns from around the country, including those people who could be impacted by the estate tax. 
 
If it's passed as proposed, Obama's budget would add $583 billion in tax hikes, including an increase in estate taxes. That's in addition to the $660 billion already implemented in January. Those tax hikes, part of the so-called "fiscal cliff legislation," were part of a bitter battle between Republicans and Democrats and were supposed to represent a cap on tax increases. Even if the president's budget proposal is rejected outright, it seems likely that the cap is only an illusion.
 
Upon presenting his proposal, President Obama told Republicans that they need to pass his budget and eliminate "special tax breaks and loopholes so millionaires and billionaires do their fair share to cut the deficit." 
 
Estate Tax
 
According to reporters at Bloomberg.com, "Obama signed a law in January that set and made permanent the current estate tax parameters." A few months later, those permanent parameters are back on the table as a way to exact that "fair share." The president's budget includes returning – by 2018 – to the estate tax scenario that was in place in 2009, when three out every one thousand people were impacted by this tax. If passed, the following parameters will be implemented, according to an analysis by the AICPA:
  • The per-person estate tax exemption would drop from the current level of $5.25 million, as indexed for inflation, to $3.5 million and will not be indexed for inflation, beginning in 2013.
  • The top estate tax rate would jump from the current level of 40 percent to a maximum of 45 percent, also for 2013.
  • The generation-skipping transfer tax would also return to these parameters, and the gift tax, to $1 million, also starting in 2013.

Estate Tax Provisions in President Obama's Budget Proposal

The AICPA says the estate tax provisions in President Obama's fiscal year 2013 budget proposal would:

  • Make permanent the portability of unused exemption amounts between spouses (starting in 2013). 
  • Require consistency in value for transfer and income tax purposes (effective date of enactment). 
  • Modify the rules on valuation discounts (for transfers after the date of enactment). 
  • Require a minimum ten-year term for grantor retained annuity trusts (GRATs) and a maximum term of the life expectancy of the annuitant plus ten years – impacting the ability to use GRATs for estate tax planning (applicable to trusts created after the date of enactment). 
  • Coordinate certain income and transfer tax rules for grantor trusts – affecting planning with intentionally defective grantor trusts (IDGTs). 
  • Limit the duration of GST exemption to 90 years (for additions to pre-existing trusts and trusts created after the date of enactment). 
  • Extend the lien on estate tax deferrals provided under Sec. 6166 up to fifteen years and three months from the date of death) (for decedents dying after the effective date and pre-existing unexpired liens on the effective date). 
 
Source: AICPA
 

Obama's budget would also curtail the ability to use what the White House calls "estate tax loopholes," which are complex estate planning strategies. These include such tools as valuation discounts; grantor retained annuity trusts (GRATs); and health and education exclusion trusts, also known as HEETs. (See sidebar for more estate tax changes.)

Tim Steffen, senior vice president and director of financial planning at Robert W. Baird & Co Inc., said, "Most planners thought the estate tax was a settled issue. Lowering the exemption to $3.5 million and removing the inflation index brings a lot of people back into owing estate taxes who thought they were exempt. The number of people subject to it will continue to grow."
 
But the Obama Administration didn't consider it a "settled issue." Regarding the bill passed in January, the budget includes this statement:
 
"As part of the end-of-year 'fiscal cliff' agreement, congressional Republicans insisted on permanently cutting the estate tax below those levels, providing tax cuts averaging $1 million per estate to the very wealthiest Americans. It [the proposed budget] would also eliminate a number of loopholes that currently allow wealthy individuals to use sophisticated tax planning to reduce their estate tax liability."
 
Acting Budget Director Jeffrey Zients summed up the president's proposal as "responsible fiscal policy." The news of the White House budget brought immediate opposition from Republicans, many Democrats, and a long list of special interests such as the AARP. 
 
Among the many other issues on the budget table are a large hike in cigarette tax, cuts in payments to Medicare providers, and trimmed Social Security benefits. No congressional action will be taken immediately to try to pass an alternate plan, but it seems certain that getting a budget in place promises to be a long, ugly fight. 
 
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