On January 2, 2013 Congress extended a majority of the “Bush Tax Cuts.” As part of that bill, the estate tax applicable exclusion amount (the amount that can be passed free of estate tax) was set at $5.25 million and indexed for inflation. This meant that a married couple, with proper planning, could pass, at death or during lifetime, as much as $10.5 million free from gift or estate tax. The gift and estate tax rate was increased to 40% from 35% in 2011 and 2012. The bill indicated this change was “permanent.”
One of the series of “revenue enhancements” (President Obama uses this term, along with “investments” any time he talks about raising taxes) in the President’s 2014 budget is a reduction in the applicable exclusion amount to $3.5 million. While this change would only effect about 2% of our population (those married taxpayers with more than $7.5 million and less than $10.5 million), the difference is significant as it could mean as much $1.5 million in taxes for these individuals. In addition, a precedent would be set, in that any time the President is looking for more revenue enhancement he want to lower the applicable amount even lower.
Another part of the President’s budget would cap retirement savings (such as an IRA or 401(k)) at $3 million. Again, this would only affect a small portion of the population, but I have a concern there could be a further reduction in the cap in the future. In addition, beneficiaries of Inherited IRAs would now be required to take their distributions over no more than ten years, a change from the current rules which allow distributions to be spread over the life expectancy of the beneficiary. This is a change that could affect a much bigger swath of the population.
Many clients came to see us for year-end planning in 2012 when the estate tax exemption amount was scheduled to drop to $1 million from the $5.12 million limit at that time. Many of these clients modified their estate plans once again in early January when they learned of the “permanent” increase in the amount that can be passed free of estate tax to $5.25 million (thinking they would like to avoid the complexity of the plans developed in 2012). For some of these clients, it looks like they will be visiting us again if the President gets his way and the estate tax applicable exclusion amount is lowered to $3.5 million. In the past the President has also proposed restricting the use of advanced estate planning strategies such the Grantor Retained Annuity Trust and Family Limited Partnership. We expect these proposals will be raised again as the President (hopefully) negotiates with Congress on how to tame the run-away government spending.
We extend to you and to your clients the offer of a free one hour consultation at our Riverside law office to discuss estate planning, elder law, planning for long term care, special needs trusts and other types of disability planning or any tax issues. Call our office at (951)787-7711 or contact us online to schedule your free consultation.