As our regular readers know, Congress made some permanent changes as part of its “fiscal cliff” remedy that have given estate planners more certainty than they’ve had in years. The permanent changes, it so happens, are quite favorable from an estate tax and gift tax perspective.
This includes a lifetime exemption amount of $5 million adjusted for inflation. This exemption is applicable for lifetime gifts, estates and generation skipping transfers. The certainty brought about by the changes, though, is somewhat offset by the uncertainty surrounding some important estate planning techniques, particularly the utilization of certain types of trusts.
Over the past few years, significant changes have been proposed in regard to these techniques in order to curb their use. The Obama Administration has expressed the desire to gain revenue from what it considers “tax loopholes” in order to offset spending cuts.
One estate planning tool that could be affected is grantor trusts, also known as intentionally defective grantor trusts. In this technique, the person who sets up the trust pays income tax on trust earnings, effectively giving a tax-free gift to the trust and lowering the value of their estate so as to decrease estate taxes.
Short term grantor retained annuity trusts could also be affected, in their case by the imposition of a 10-year-minimum term on grant retained annuity trusts, perhaps couples with a required gift element.
Discounted entities and dynasty trusts could also be targeted by decreasing availability of valuation discounts and other proposals like the 90-year limitation on generation-skipping transfer exempt dynasty trusts.
The bottom line is that these valuable strategies may be affected for the worse going forward. It is important that anybody engaged in estate planning consult with a knowledgeable attorney who can help them to properly structure their estate should any changes come.
Source: Forbes, “Estate Planning Moves BEFORE Sequestration IS Resolved,” Rob Clarfeld, March 8, 2013