Many people have been closely watching the development of the federal budget, keeping an eye on how limited funds and the current financial climate may affect the budget. What many may not have thought of, however, is the implications the budget could have for their estate plans.
Part of the White House’s strategy to balance the budget and increase revenue involves closing “tax loopholes.” This may include restricting certain estate planning practices and techniques that have previously been available to those crafting their estate plans. Some of these restrictions had been part of federal budget talks for months.
For example, the administration’s proposed budget imposes serious restrictions on grantor retained annuity trusts. These trusts allow estate planners to transfer wealth and minimize the gift tax cost of transfer. To establish a grantor retained annuity trust, a grantor establishes an irrevocable trust with assets that are likely to increase in value, then retains interest for two or more years.
If the grantor is still alive at that time, the assets in the trust are transferred to its beneficiaries. The estate can claim a larger transfer tax benefit the more the assets in the trust appreciate. The White House has proposed a requirement that these trusts have a minimum term of 10 years. This would increase the likelihood that the grantor would die during the term of the trust and make it more difficult to attain those estate and gift tax savings.
Next week we’ll talk about some other ways that estate planning vehicles could be affected by the federal budget.
Source: Advisor One, “Obama Budget Endangers Some Estate Planning Techniques,” Michael Fischer, March 21, 2013