Proposed Federal Budget Would Hit Estate Plans Hard

President Obama’s Proposed Budget Causes Estate Planning Stirestate planning tax changes

President Obama’s administration recently released his budget for the fiscal year ending December 30, 2015.  If some or all of the provisions dealing with estates become law, there may be quite a bit of estate plan shuffling in the coming years. Below is a summary of the items related to estate, gift and generation-skipping transfer (GST) taxes:

  1. Exemptions and rates take the time machine back to 2009:

Estate, gift and GST transfer tax exemptions and rates would return to 2009 levels – a $3.5M exemption and a 45% rate. Importantly, the gift tax exemption would only be $1M.  No indexing for inflation. (No gift or estate tax would be imposed for gifts over those amounts since then, while exemptions were higher.)

  1. GRATs would become a lot less attractive:

Grantor-retained annuity trusts (GRATs), a popular wealth transfer technique that currently enjoys favorable tax rules, would undergo the following changes:

  • maximum term of 10 years plus the grantor’s life expectancy;
  • decreasing payout GRATs prohibited;
  • tax-free asset substitutions prohibited;
  • minimum gift of 25% of the value of the transaction, with a $500,000 minimum gift amount.
  1. IDGTs would truly be “defective”:

Sales to Intentionally Defective Grantor Trusts (IDGTs) would be subject to estate tax inclusion (or gift tax inclusion if grantor trust status terminates prior to death). This part of the proposal will be effective as of the date of enactment, so no grace period for last-minute IDGT sales.

  1. Show’s Over for “Dynasty Trusts”:

The GST exemption would be modified so that a trust’s exempt status would terminate on the 90th anniversary of the creation of the trust. Currently, once a trust is exempt from GST transfer tax, it is so permanently. This change would bring the trust assets back into the estate & GST transfer tax regime after about a generation or two.

  1. No more Crummey trusts.

The budget proposal would limit total annual exclusion gifts per donor to $50,000. This proposal would also eliminate the present value interest requirement for gifts. (At least you wouldn’t have to write those annoying Crummey  letters anymore….)

  1. IRA Clampdowns – on how much and how long:

a. “Cap” of $3.4million. The total amount allowed in all of your IRAs and other retirement plans would be about $3.4 million. This proposal is technically structured in reverse; that is, you will not be permitted to contribute to your retirement plans any more once the total balance exceeds the lump-sum payment it would take to produce a joint and 100% survivor annuity of $210,000 a year, beginning when you turn 62. Currently, this would cap retirement savings at approximately $3.4 million.

b. Death of the “stretch-out IRA.” Spouses will still be allowed to rollover their deceased spouse’s account to the surviving spouse’s own account. But, non-spouses will have to take the full amount of an inherited IRA out within 5 years. This means children and other non-spouses would no longer be able to withdraw the IRA over their lifetimes.

Many of these are controversial and will face stiff opposition. For example, the “cap” on retirement savings seems absurd – as recently as 2008, we learned that it’s probably not possible to save too much for retirement.

In addition, there are a few would-be painful income tax increases in the budget proposal, including a potential long-term capital gains rate of 24.2%. Of course, the budget proposal is just that: a proposal. Some might say a “pipe dream” given the Republican-controlled Congress.

Currently there’s no reason to believe any of these proposals will become tax law. Certainly the current administration has proposed some variation of these each year.

But strange things happen in politics. We’ll keep you posted.


About Oakstone Law, PL

Oakstone Law PL was founded by Bob Kleinknecht. A member of the Family Trust Subcommittee, the Estate Tax & Trust Planning (ETTP) Committee and the Real Property, Probate & Trust Law (RPPTL) Section of the Florida Bar, Kleinknecht has 15 years’ experience.

Prior to founding Oakstone law, he spent more than eight years serving as a personal, in-house estate, tax and charitable planning attorney for a Forbes 400 family in New York and Florida. Before that he was an estate planning and estate settlement attorney with prominent firms in Boston and Washington, D.C. after beginning his career with a boutique firm in Naples, Florida.

Licensed in Florida and Massachusetts, Kleinknecht has developed a practice model that eliminates billing by the hour and offers a streamlined, customized client process supported by technology, security and a personal approach.

For more information on Oakstone Law, click here. To get in touch with us, click here to send us an email, or call 239-206-3454. Our office is located at 5137 Castello Drive, Suite 2 in Naples, Florida 34103.

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Oakstone Law
1415 Panther Lane, Suite 439
Naples, Florida 34109
Tel: 239.206.3454