May 21

Written by: David Keligian
5/21/2013 2:28 PM  RssIcon

The end of 2012 was a tumultuous time for estate planning. No one—Congress, planners, or clients—knew anything for certain other than the high estate and gift tax exemption might (and temporarily did) go away at the end of 2012.

Congress and the administration soon agreed that for 2013, both the estate and gift tax exemptions would be “permanently” set at $5,250,000, with inflation adjustments. Some people who rushed into 2012 planning may have thought that the rush was unnecessary. Those who procrastinated breathed a sigh of relief, thinking they could wait to do their planning.

President Obama’s fiscal year 2014 budget illustrates how uncertain the situation remains, and how quickly the rules for estate planning can again change. While budgets represent something of a “wish list” for different types of tax increases, there are several key points about the 2014 budget.

First, President Obama has proposed returning the 2018 estate tax rates to the 2009 levels—estate and gift tax rates of 45%, an estate tax exemption of $3.5 million, and, most significantly, a gift tax exemption of only $1 million.

The budget contains the same proposals to eliminate family entity discounts and, more importantly, eliminating “grantor trust” treatment. The elimination of grantor trusts would negate one of the most powerful wealth transfer techniques available, and that change can be made before 2018.

The moral of the story is that, for larger estates, planning should be a continuous process. The political landscape is so unpredictable that tax law changes with huge negative consequences can occur with little warning.

Because of that, we are still strongly recommending creating and “seeding” beneficiary defective irrevocable trusts (“BDITs”) or intentionally defective irrevocable trusts (“IDITs”) that may allow future flexibility to make wealth transfers at minimal gift tax cost. As just one example, such trusts can own significant interests in new business ventures. It makes more sense to hold such assets outside your taxable estate from the very beginning, rather than hold them inside your taxable estate, only to have to worry about how to transfer it out of your estate later.

Business founders can still control the business through a combination of voting and non-voting stock, with the founder owning a small percentage of the voting stock but controlling major decisions. In the current political environment, where tax and spending deals are struck very quickly (with little thought to what the ultimate consequences will be), there is no such thing as being “done” with your planning.

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