The American Taxpayer Relief Act of 2012 left wealth planners’ estate planning tool chest largely intact, but the White House budget for 2013 and comments by congressional leaders strongly suggest their permanence is anything but assured.
In the aftermath of the Jan. 1 passage of ATRA, both Senate and House leaders said that the act was only a first step in righting the country’s fiscal house, intimating that rules made permanent by the act may indeed be temporary.
Meanwhile, President Barack Obama’s 2013 budget proposal would restrict certain estate planning techniques as a way to close “tax loopholes”; some of these proposals were under discussion long before enactment of ATRA.
ATRA left untouched grantor retained annuity trusts, which allow for the transfer of wealth while minimizing the gift tax cost of transfer. The administration’s proposal would impose severe restrictions.
In setting up a GRAT, a grantor funds an irrevocable trust with assets likely to appreciate in value, and retains an annuity interest for a number of years—sometimes as few as two years.
After that, if the grantor is still alive, the assets left in the trust are transferred to beneficiaries. The more the value of the assets held by the trust appreciates, the greater the transfer tax benefit the estate can claim.
The White House proposal would impose the requirement that a GRAT have a 10-year minimum term and a maximum term of life expectancy of the annuitant plus 10 years. “The administration’s proposal would require, in effect, some downside risk in the use of this technique,” said Jeff Marshall, a Pennsylvania tax lawyer.
In other words, the likelihood that the grantor could die during the term of the GRAT would increase, thereby undermining the estate and gift tax savings she sought.