Estate Tax and President Obama’s 2013 Budget

Earlier this month, President Obama released his 2013 budget proposal. While much of the media coverage has focused on the treatment of individual income tax rates for upper-income earners, the budget proposal also laid out substantial changes to our current estate, gift, and generation-skipping transfer tax regimes. Although the budget proposal is merely aspirational and is not enacted into law in its current form, it is useful to start the discussion of how Congress may ultimately change the law.

The budget proposal states that the estate, gift, and generation-skipping transfer tax regimes will ultimately revert back to those in effect in 2009. This will lead to lower exemption amounts and higher tax rates. For example, the estate tax exemption will become $3,500,000, reduced from this year’s $5,120,000. Further, the estate tax rate will return to 45% from its current 35% rate. Similarly, the generation-skipping transfer tax exemption will be reduced to $3,500,000, with a 10% tax rate increase. However, the largest changes occur in the gift tax regime. The lifetime gift tax exemption will be reduced to $1,000,000 from this year’s $5,120,000, a reduction of over 80%. The gift tax rate will also increase 10% from its current rate of 35%.

Other changes are outlined, including changes to the valuation of certain property, modification of the rules governing valuation discounts, limitations on the use of GRATs (grantor-retained annuity trusts) and Dynasty Trusts, and reporting requirements imposed upon the executor of an estate. These proposals, along with many others can be viewed here [link: http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2013.pdf]. Although this is merely a budget proposal, it does give you sneak peek at where the law may be changing and also highlights the enormous benefits of estate planning today. Take advantage of the current environment and start making your estate plans today.

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