(Dow Jones) The Obama administration's proposed budget calls
for lots of changes that could affect your estate plans, and ignorance
isn't bliss—it's foolhardy.
Some of the proposals might become reality, some might get
modified, and some may never see the light of day. Still, many experts
have been sounding the alarm for a while, urging all who will listen
that time is running out to take advantage of some sweet,
once-in-a-generation chances to save money.
Given the relatively low interest rates and transfer tax
values, and some Uncle Sam-sanctioned planning techniques, there is a
window of golden opportunity, according to Steve Leimberg, the
publisher of Leimberg Information Services Inc. and author of "Tools
and Techniques of Estate Planning."
But now that Obama has released the 2011 budget, "the window
of opportunity for a number of popular and highly effective estate and
financial planning techniques is rapidly closing," according to a
recent Leimberg missive.
So what should you consider doing given these potential changes?
1. Tax basis consistency
Tax basis is generally the price you paid for property, plus
the cost of improvements, less depreciation if applicable, according to
Martin M. Shenkman, an attorney and certified public accountant.
"Tax basis is used to determine gain or loss when property
is sold," said Shenkman, who has written several books, including
"Living Wills & Health Care Proxies: Assuring That Your End of Life
Decisions Are Respected."
"If you received property by gift, tax basis is generally
the same as the person who gave it to you. This is called the
'carryover basis,'" he said. If you inherit property, the basis is
generally the fair value of the property at death as reported for
estate tax purposes.
Not surprisingly, he said there have been abuses. "For
example, if someone gave you a gift that was worth less than the annual
gift exclusion [$13,000 in 2010] no gift tax return would report the
information to the IRS," he said.
"Similarly, if someone bequeathed you property and their
estate was less than the estate-tax filing threshold [$3.5 million in
2010 assuming the estate tax is reinstated], no estate tax return has
to be filed. If property was owned by you and the decedent jointly it
passes to you by operation of law with no documentation necessarily
required. How does the IRS know that you're 'fessing up to the real
value?" Shenkman said.
Well, according to Shenkman, Obama's proposal would require
that the basis of the property in the hands of the recipient be no
greater than the value of that property as determined for estate or
gift tax purposes, subject of course to subsequent adjustments.
"And to make sure this happens, reporting requirements will
be added. Executors, for estates, and donors, for lifetime gifts, will
be required to provide the necessary information to both the recipient
and the IRS," Shenkman said.
And lest you think this is a tiger without teeth, Shenkman
noted that the Treasury Department will be given authority to issue tax
regulations. "So, in the words of Captain Jean-Luc Picard, the
fictional Star Trek character, to Commander Will Riker, 'Well, make it
so, No. 1,' the Treasury Department will make sure to cover the tax
collector's back with guidelines as to the implementation and
administration of these requirements."
The proposal would be effective as of the date of enactment, according to Leimberg.
2. Valuation discounts
According to Shenkman, gift, estate and
generation-skipping transfer (GST) tax rates are applied to the value
of assets transferred above certain threshold amounts. "While taxpayers
can't change the rates they pay, they can reduce tax if values are made
lower," he said. "So contractual and other restrictions were created
that reduced the value of assets."
In essence, family-controlled entities got to use interest
rates to value the business at discounts below what some might consider
a fair market value when ownership interests were transferred by
bequest or as a gift to family members.
Given the potential loss in tax revenue from that practice,
Obama wants Uncle Sam to have his due. So the administration is
proposing a new category of restrictions called "disregarded
restrictions."
Treasury will issue regulations identifying which
restrictions will be ignored in valuing interests in family-controlled
entities if the ownership interests involved are transferred by bequest
or gift to family. These will include interests that can be removed by
family members and even charity, said Shenkman.
"The reduction in discounts, long talked about, will impact
a myriad of planning techniques and take the juice out of many deals
that would have been quite effective prior to discounts," Shenkman
said. "Alas, using grantor trust statutes to leverage gifts and other
joyful tax techniques will likely become even more popular if the
discount toy is taken off the game board."
According to Shenkman, these new rules will apply to
transfers after the date of enactment if the restrictions were created
after Oct. 8, 1990. Rules that apply to sales of life insurance
contracts would be modified.
3. Grantor retained annuity trusts
Grantor retained annuity trusts have been a
favored tool of the rich and famous. Just ask Robin Leach. Here's how
it works, according to Shenkman: Assets are given to a trust for a
short, say, two-year period. A very high annuity payment is paid back
to the person setting up the trust—the grantor—that effectively makes
the value of the GRAT zero for gift tax purposes. If the assets given
beat a specified market interest rate, all that extra growth is out of
the estate. No downside risk.
The Obama administration seeks to assure that taxpayers have
a bit of skin in the game. "So GRATs have to last a minimum of 10
years, thus increasing the mortality risk of the technique," said
Shenkman. "GRATs might have to have something more than a zero gift tax
value and the annuity payments may not be permitted to be decreased
during the GRAT term."
Yes, GRATs will remain viable, he said. But perhaps not for
older taxpayers, and they just won't be as effective or as much fun.
These restrictions are to be effective from the date of enactment.
Keep in mind that "it's a long way from a proposal to
effective law," according to Leimberg. "But with a fiscal crisis as
severe as the one we are (still) going through, the probability of
enactment is higher-—much higher—and the time for effective action is
getting shorter—much shorter."
Copyright (c) 2010, Dow Jones. For more information about Dow Jones' services for advisors, please click here.
|
CONFERENCES
Dorothy 
