On March 4, the Treasury Department released its 2015 Green Book describing the administration's budget proposals for the coming year. With respect to transfer taxes, the budget renews every transfer tax proposal from the FY2014 budget in almost the same form, including:
- Beginning in 2018, reinstatement of 2009 transfer tax laws (i.e., 45 percent top transfer tax rate; $3.5 million estate and GST
tax exemptions, $1 million gift tax exemption), with portability.
- Require that the basis of property in the hands of the recipient of a gift or devise could be no greater than the value of that
property as determined for estate or gift tax purposes (subject to subsequent adjustments). A reporting requirement would be imposed on executors and donors to provide the necessary valuation and basis information to both the recipient and IRS.
- Require a 10-year minimum term for GRATs, and a maximum term of the life expectancy of the annuitant plus 10 years. Also, the remainder interest would have to have a value greater than zero at the time the interest is created, and any decrease in the annuity during the GRAT term would be prohibited.
- On the 90th anniversary of the creation of a trust, limit the duration of GST tax exemption by providing that the GST exclusion allocated to the trust would terminate.
- Limit the effectiveness of sales to grantor trusts by causing a portion of the property sold to be included in the grantor’s estate for federal estate tax purposes.
- Elimination of GST tax benefits for health, education and exclusion trusts (HEETs).
The budget also adds a new proposal dealing with annual exclusion gifts made to trusts or other entities where the donee does not have immediate use of the funds (i.e., a present interest). The IRS’s concern has been that Crummey powers
could be given to multiple discretionary beneficiaries, most of whom would never receive a distribution from the trust, and thereby inappropriately exclude from gift tax a large amount of contributions made to the trust. The IRS has sought (unsuccessfully) to limit the number of available Crummey
powers by requiring each powerholder to have some substantial vested economic interest in the trust over which the power applies. See Estate of Cristofani v. Comm’r
, 97 T.C. 74 (1991), where the Tax Court allowed Crummey
powers for both the grantor’s children and grandchildren, even though the grandchildren were only contingent remainder beneficiaries (if their parents predeceased the grantor).
The proposal would define a new category of transfers and would allow an annual exclusion of $50,000 per donor on transfers within this new category. No Crummey
withdrawal powers would be necessary for the amount to qualify for this annual exclusion. This proposal, if implemented, could substantially simplify insurance trust funding and eliminate the hassles of Crummey
notice administration (by eliminating the present interest requirement for gifts that qualify for the gift tax annual exclusion). However, the “cost” for such simplicity could be expensive for high-net-worth donors with multiple beneficiaries by only allowing a $50,000 annual gift tax exclusion per donor (rather than allowing these types of gifts to qualify for the current gift tax annual exclusion
of $14,000/$28,000 per donee).
Many of these strategies, if implemented now, would be “grandfathered” and not subject to the proposed law changes, if any are
THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. THE MATERIAL IS BASED UPON GENERAL TAX RULES AND FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED AS LEGAL OR TAX ADVICE AND TAXPAYERS SHOULD CONSULT THEIR OWN LEGAL AND TAX ADVISORS AS TO THEIR SPECIFIC SITUATION.