Top 5 ways Obama's 2014 budget plan will affect your clients
By Jeff Reed
Kestler Financial Group
Just when we thought that there was going to be some stability in the estate tax law for the foreseeable future, there appears yet another source of possible change: President Obama's proposed 2014 budget.
While many of us breathed a sigh of relief when the new law passed last year, extending the large exclusion amount as well as keeping the top rate a moderate 40 percent, it now appears that this may have been a temporary fix.
In very broad terms, here's what's included in the budget proposal:
- Increase in the top rate from 40 percent to 45 percent
- Rollback of the exclusion amount from the current $5 million to $3.5 million
- Elimination of the indexing for inflation
Unfortunately, that's not the end of the story.
In addition to changing rates, there are elements of the budget that directly attack one of the tools that has been used for estate planning for decades: grantor trusts.
Talk about a game changer.
The primary target is the idea of estate "freezes." Specifically, the proposed budget calls for inclusion, for estate and gift tax purposes, of any assets that are sold to a grantor trust or exchanged for existing trust assets.
Further, any growth of the trust that is attributable to those assets would also be included for estate and gift tax purposes — bad news for many wealthy families.
There are also changes aimed at GRATs, including a minimum term of 10 years.
You can read more about some of the estate tax related elements of the budget proposal here beginning on page 148 of the pdf.
And this commentary from Miles Padgett and Donald Kozusko is an interesting discussion of public policy aspects of these proposals, as well as the challenges posed by compliance with these new provisions should they become law.
So, what does it all mean for the practitioners and their clients?
One message is abundantly clear: There's nothing permanent about the estate tax. The obvious takeaway from that is any planning that relies upon the current legislation being in place at death is almost certainly flawed.
Plan for the future
The larger issue, perhaps, is how to plan now for changes in the future.
One item that is not directly addressed in the law is the issue of grandfathering existing grantor trusts. While I can't imagine existing trusts or prior transactions being subject to the new law, there is the issue of documentation.
Believing that a transaction should not be subject to the new laws and actually proving it are completely different exercises, and I think that the IRS's views on something as simple as documenting cost basis may be an indicator of where the burden of proof lies.
Clearly, this is an issue worth watching.
One last note: There are other important issues in this proposal, such as the forced liquidation of retirement accounts after five years for non-spouse beneficiaries.
Goodbye stretch IRAs? Time to start thinking about pther wealth transfer strategies.
Want to learn more? Contact me and I will provide you with more details about Obama's 2014 proposed budget plan.