Return to 2009 Estate Tax Rates Proposed in President's FY 2014 Budget

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By Diane Freda  


President Obama's fiscal year 2014 budget would return estate tax rates in 2018 to 2009 levels, when the estate and gift tax rates were 45 percent, the estate tax exemption was $3.5 million, and the gift tax exemption was $1 million.

The proposal would overturn the estate tax provisions of the January fiscal cliff deal struck by Congress in the American Taxpayer Relief Act of 2012 (Pub. L. No. 112-240), which set the estate and gift tax rates for the highest tax bracket at 40 percent with a $5 million exemption, indexed for inflation. The budget proposal would eliminate indexing for inflation and would raise approximately $72 billion over 10 years.

Under 2009 law, the president said only the wealthiest three in 1,000 people who die would owe any estate tax. His budget noted that as part of the end-of-year fiscal cliff agreement, congressional Republicans insisted on permanently cutting the estate tax below those 2009 levels, providing tax cuts averaging $1 million per estate to the very wealthiest Americans.

The 2014 budget proposal also resurrects several other provisions that were included in the administration's FY 2013 budget--namely coordinating the income and transfer tax rules applicable to grantor trusts; requiring consistency in value for transfer and income tax purposes; limiting the duration of generation-skipping transfer tax exemptions; and extending liens on estate tax deferrals under Section 6166.

One new estate tax proposal surfaced for FY 2014--clarifying the generation-skipping transfer tax treatment of health and education exclusion trusts. A proposal from last year on modifying the rules on valuation discounts that had been an administration proposal for more than a decade dropped off.

Rate Question to Surface in Tax Reform

Lindy Paull, a principal with PricewaterhouseCoopers, said April 10 that the effective date on the proposal to raise the estate tax in 2018 was odd and may have been designed to give Congress time to calm down after making the estate tax rates permanent in early 2013.


If individual income tax rates are reduced as part of a more comprehensive overall comprehensive tax reform effort, does it mean the estate tax will be revisited?



Lindy Paull, PricewaterhouseCoopers

She and others said the proposal may be more about Obama making a statement in opposition to the deal he was forced to take early in the year in order to get tax increases on higher income Americans.

“We were expecting a lot of consistency in the budget proposals on the revenue side,” Paull said, “but it is strange for the effective date to be so far out.”

Furthermore, she said, based on recent changes, it looks like the estate tax rate is being tied to the top rate for individuals, and the more interesting question is what happens if individual income tax rates are reduced as part of a more comprehensive overall comprehensive tax reform effort. “Does it mean the estate tax would be revisited?” she asked.

House Budget Committee chairman Paul Ryan (R-Wis.) expressed disappointment with the estate tax proposal saying the president was reopening discussion on agreements that had already been achieved.

Coordination of Income, Transfer Tax

Perhaps the most closely watched proposal for 2014 involved coordinating certain income and transfer tax rules applicable to grantor trusts. Estate tax advisers complained that it would totally upset wealth planning strategies by merging two tax systems that were never meant to be reconciled.

The 2014 proposal has been narrowed in scope, so that provisions that might have implicated insurance trusts in the 2013 proposal now appear to be out, but installment sales contracts are implicated.

Last year's proposal would have required that the assets of any grantor trust be included in the grantor's gross estate. The new proposal applies not to grantor trusts as such, but to assets that such a trust receives in certain kinds of transactions, Ron Aucutt, partner with McGuireWoods, told BNA April 10. “The focus this time around is not on the trust but the transaction,” he said.

“The proposal is narrower than what we saw last year by far, but it is still surprisingly broad to me in that it applies to every single installment sale without any exception,” he said. Some will say it is the end of installment sales--an effective and popular planning tool--to grantor trusts, he said.

The item raises a little more than a billion dollars, compared to the grantor trust proposal in last year's budget which raised a little less than a billion.

New HEET Proposal

Beth Kaufman, a partner with Caplin & Drysdale, told BNA April 10 that the effective date on the health and education exclusion trust (HEET) proposal is “scary.” It is being treated like a loophole-closer because the administration is giving it an effective date of the date of introduction rather than the more common date of enactment, she said.

“That's something the government does when they've got something they really want to shut down,” she said, adding that someone in the administration must think there is a big gaping hole in the generation-skipping transfer tax. “It means all these grantor trusts that got set up last year could potentially be subject to this rule even though they already exist,” she said.

The proposal would clarify that the exclusion from the definition of a generation-skipping transfer tax under tax code Section 7611(b)(1) applies only to a payment by a donor directly to the provider of medical care or a school in payment of tuition, and not to trust distributions even if for those same purposes.

By Diane Freda  

Texts of the General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals (Green Book) and a Treasury news release on the tax provisions in the FY 2014 budget are in TaxCore.

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