President Obama’s new budget proposal calls for returning the estate tax in 2013 to its 2009 level: a $3.5 million estate and generation skipping tax exemption per person, a $1 million per person gift tax exemption, and a 45% rate. President Obama’s December 2010 deal with Republicans raised the estate, gift, and GST exemptions to $5 million and lowered the tax rate to 35% for 2011 and 2012. The budget also repeats Administration proposals made last year to limit the benefits of GRATs and family partnerships, and it continues portability (see last Client Update Newsletter). If a deal is not reached with Congress, in 2013 the estate tax will drop back down to its pre-Bush level through automatic sunsetting mechanisms, with exemptions of only $1 million and a 55% rate. President OBama’s proposals are expressly intended to be effective on the date of sunsetting of President Bush’s tax cuts, thus providing an appearance his proposals are increasing tax exemptions from $1 million to $3.5 million.
We are encouraging those with potential taxable estates to consider methods of locking-in use of their exemptions in advance of tax reform. GRATs, use of family partnerships, sales to intentionally defective trusts, and quasi-spousal reciprocal trusts should be considered.