Do they merit your consideration?
With the ongoing efforts in Congress to reduce the deficit and the Super Committee’s proposal deadline looming, speculation has been rampant regarding possible imminent changes to estate and gift tax laws. While there’s significant uncertainty regarding the final outcome, and current concerns appear to stem from Capitol Hill “chatter,” it may be worthwhile to consider possible outcomes to assess the impact of any potential changes.
Nov. 23 Deadline
Pursuant to the Budget Control Act of 2011, which was passed in August, a special committee of Congress (the Super Committee) has until Nov. 23, 2011 to issue a formal proposal containing at least $1.2 trillion in deficit reduction for the full Congress to consider. Congress will then have until Dec. 23, 2011 to enact the proposal, without amendments, by pure majority vote in each chamber. If the deadline isn’t met, sequestration cuts totaling $1.2 trillion in deficit reduction will be triggered, slashing defense spending and Medicare benefits.
Return of 2009 Estate Exemption Levels
Over the past two months, most of the Super Committee’s work has been conducted behind closed doors, making speculative any predictions regarding its recommendations. However, according to a report released by the White House’s Office of Management and Budget, “the Administration remains opposed to the extension of these high income tax cuts past 2012 and supports the return of the estate tax exemption and rates to 2009 levels.”1 Similar language reportedly appears in the Democratic wish list for the Super Committee’s consideration.
Of course, the high income tax cuts were extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the 2010 Act), which was enacted on Dec. 17, 2010. Pursuant to the 2010 Act, the 35 percent maximum income tax rate and the 15 percent tax rate on dividends and long-term capital gains were extended through 2012. For 2011 and 2012, the 2010 Act also increased the federal estate and gift tax exemption to $5 million ($10 million for a married couple) and reduced the top estate and gift tax rate to 35 percent from 45 percent. The 2009 exemption amounts were $3.5 million for estate tax purposes and $1 million for gift tax purposes.
$5 Million Gift Tax Exemption
In light of the pressing need to find new sources of revenue, speculation has been swirling that the Super Committee may propose legislation that will reduce the $5 million federal gift tax exemption to the $1 million 2009 levels before the end of 2012 (even though the Office of Management and Budget Report refers only to the estate tax). Speculation includes the possibility that this may occur as early as Nov. 23 (the date on which the Super Committee must issue its proposal). While other practitioners believe that an accelerated change in the law is unlikely to occur, it’s impossible to predict the outcome with certainty.
Other Wealth Management Strategies
Some practitioners have voiced concern that changes could also be made to curtail several other wealth transfer strategies, including grantor retained annuity trusts (GRATs)2 and discounting for transfers of interests in family entities.
What to Think About?
While it remains to be seen what actions Congress will actually take, in the interim, you might discuss the following steps with appropriate clients:
· If your client was planning on using the increased $5 million gift tax exemption before the end of 2012, he might consider the advisability of accelerating gifting in 2011 (possibly prior to Nov. 23) and potentially using strategies designed to leverage the historically high $5 million gift tax exclusion. In fact, with Internal Revenue Service interest rates at historic lows, integrating planning techniques that leverage low rates to maximize transfer tax savings may be particularly compelling;
· If your client was considering pre-sale business planning, he might consider accelerating planning to take advantage of leverage techniques such as GRATs, sales to irrevocable grantor trusts and family transfer discounting in conjunction with the historically high $5 million gift tax exemption and historically low interest rate environment; and
· Your client might consider reviewing his current estate plans in view of possible and impending changes in the law.3
1. Report released on Sept. 18 by the White House’s Office of Management and Budget, “Living Within Our Means and Investing in the Future, The President's Plan for Economic Growth and Deficit Reduction.”
2. There’s some concern that changes to curtail the grantor-retained annuity trust technique could have retroactive effect.
3. “Clawback” considerations for gifts made in 2011 or 2012 in excess of $1 million might factor into the analysis.
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, please be advised that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
This material is written by Lazard Wealth Management LLC for general informational purposes only and does not represent our legal advice as to any particular set of facts and does not convey legal, accounting, tax or other professional advice of any kind; nor does it represent any undertaking to keep recipients advised of all relevant legal and regulatory developments. The application and impact of relevant laws will vary from jurisdiction to jurisdiction and should be based on information from professional advisors. Information and opinions presented have been obtained or derived from sources believed by Lazard Wealth Management LLC to be reliable. Lazard Wealth Management LLC makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the date of this presentation and are subject to change.