"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."
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