Potential Estate Tax Changes
Posted Monday, May 13, 2013 by John S. Palmer
The Obama Administration has proposed changes in both the tax rate and exclusion amount for federal gift, estate and generation skipping taxes that would apply to the estates of decedents dying after December 31, 2017. The changes are part of the administration’s fiscal year 2014 revenue proposals.
Currently, the top tax rate for federal gift, estate and generation-skipping taxes is 40 percent, and each individual is permitted a lifetime exclusion for all three taxes of $5 million, indexed for inflation after 2011 ($5.25 million for 2013). Moreover, a surviving spouse of a person who dies on or after January 1, 2011 may increase his or her lifetime exclusion amount by the portion of the deceased spouse’s unused exclusion amount through a relatively new process known as portability.
Under the Administration’s proposal, starting in 2018 the top tax rate for federal gift, estate and generation-skipping taxes would increase to 45 percent; the lifetime exclusion amount would be reduced to $3.5 million for estate and generation skipping taxes, and $1 million for gift taxes, all with no indexing for inflation. However, portability of unused gift and estate tax exclusions between spouses would be allowed.
None of these changes would affect state taxes; Washington currently has no gift tax, and taxes estates of $2 million or more, with a top tax rate of 19% and no portability of a deceased spouse’s unused exclusion amount to a surviving spouse.
The administration’s proposal also would make a number of other changes to federal tax laws prior to 2018, including:
Requiring non-spouse beneficiaries of a deceased IRA owners and retirement plan participants to take inherited distributions over no more than 5 years (this would be applicable to plan participants or IRA owners who die after December 31, 2013, or those who die before then if the beneficiary dies after that date).
Imposing a consistency and reporting requirement with regard to the tax basis claimed for gifted or inherited property. The tax basis claimed by an heir or beneficiary who received the property by inheritance would have to be the same value placed on the property by the executor for estate tax purposes, and the basis claimed by a donee of property received by inter-vivos gift would have to equal the donor’s basis. A reporting requirement would be imposed on the executor or donor to provide the necessary valuation and basis information to both the recipient and IRS. These provisions would apply to property transfers made on or after the date of enactment.
Imposing a 10-year minimum term for grantor-retained annuity trusts (GRATs). As explained in the administration’s proposal, “GRATs have proven to be a popular and efficient technique for transferring wealth while minimizing the gift tax cost of transfers, providing that the grantor survives the GRAT term…Taxpayers have become adept at maximizing the benefit of this technique, often by minimizing the term of the GRAT (thus reducing the risk of the grantor’s death during the term), in many cases to two years…The proposal would require, in effect, some downside risk in the use of this technique by imposing the requirement that a GRAT have a minimum term of ten years and a maximum term of the life expectancy of the annuitant plus ten years.” This proposal would apply to trusts created after the date of enactment.
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