Increased Federal Tax Proposals for year 2015 Budget Announced

Increased Federal Tax Proposals for year 2015 Budget Announced

The Obama Administration’s Fiscal Year 2015 Revenue Proposals have been published, and there are numerous suggested proposals which increase taxes in connection with estate planning. Although the Senate passed proposals this past week retaining certain tax incentives for businesses and individuals, the revenue proposals included various measures to either increase the amount of taxpayers who must pay additional taxes or accelerated payment of taxes including, but not limited to, the following:

  1. Permanently reduce (as of year 2018) estate, gift and generation-skipping transfer tax (GST) parameters to what they were in year 2009 (presently estate and GST taxes are only on estates that exceed $5,340,000 and Texas does not have an additional state tax on lower amounts). In year 2009, the estate tax and GST tax rate was 45% on estates that exceeded $3.5 million and a gift tax (tax rate was also at 45%) for gifts in excess of $1 million. Presently the limit on lifetime gifts in excess of the annual exclusion without gift taxation matches the limit on estates ($5,340,000) without federal estate taxation. In computing the taxes, no estate or gift or GST tax would be incurred by reason of decreases in the applicable exclusion amount with respect to a gift that was excluded at the time of the transfer (the proposal would be effective for transfers made after December 31, 2017). The unused portion of the $5,340,000 estate and gift tax exclusion of a decedent electing portability (the surviving spouse can elect use the remaining unused exclusion of the decedent) and dying on or after the effective date of the proposal would be available in full to the surviving spouse on the surviving spouse’s death, but would be limited during the surviving spouse’s life to the amount of remaining exemption the decedent could have applied to his or her gifts made in the year of his or her death. Bottom line: increase revenue by taxing more people since there is a lower threshold for there to be taxation.
  2. Limit  the amount a taxpayer can give in the calendar year to $50,000 total as opposed to the current rule of $14,000 per year, per donee (and therefore such gifts don’t use up any of the donor’s applicable lifetime exclusion which is presently $5,340,000) for estate and gift tax purposes. To qualify for this exclusion under current law, each gift must be of a present interest (which is an unrestricted right to the immediate use or enjoyment of property or income from the property). Although a transfer to a trust for the donee would normally be considered a future interest, a court case (Crummey v. Commissioner) ruled over 40 years ago that if the beneficiary of the trust had an unrestricted right to withdraw even if it was for a very limited time and thereafter lapses, it would instead qualify as a present interest. Ever since that time, estate planning attorneys have taken advantage of that ruling as wealthy donors often create trusts for multiple beneficiaries and gift large amounts to the trust tax-free.  The new proposal would limit the total taxable gifts to $50,000 a year even if the total gifts to an individual did not exceed $14,000 in a year. Limitation of the Crummey power would be considered a major change in estate planning.
  3. Require non-spouse beneficiaries of deceased IRA owners to take inherited distributions over no more than five years as opposed to the current rule of allowing distributions over the lifetime of the beneficiary. Presently many non-spouse IRA beneficiaries elect treatment as an “inherited IRA” so that money grows tax-deferred over their lifetime instead of being immediately taxed. Furthermore, subsequent beneficiaries can presently take the stretch over the lifetime of the designated beneficiary when the designated beneficiary dies. So, the proposed rule would prevent a non-spouse beneficiary from enjoying tax-favored accumulation of earnings over long periods of time. There would be exceptions to the rule if the beneficiary is a minor, disabled or less than 10 years younger than the IRA owner. In the case of a child, the account would need to be distributed within five years after reaching the age of majority. The proposal is to be effective for IRA owners who die after December 31, 2014.
  4. Other proposals include requiring grantor retained annuity trusts (GRATs) to have a minimum term of 10 years and reducing the length of time that Dynasty trusts can remain tax free.

These are but a few of many proposed changes that can adversely affect taxpayers or their beneficiaries or heirs.

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