President Obama hopes to change the tax laws to take away or limit many estate plan strategies that save taxes for families. Grantor Retained Annuity Trusts, annual exclusion gifts and generation-skipping trusts are but a few of the items on the hit list. Moreover, Obama wants to rollback the estate tax exemption to $3.5 million per person, limit the lifetime gift/Generation-skipping tax exemptions to $1 million per person, and raise the top tax rate back to 45%.
One proposal that would impact life insurance needs is a so-called “simplification” of the gift tax exclusion for annual gifts. Currently an individual can make as many $14,000 gifts to as many people as he wants without having to worry about estate or gift taxes. Under the proposal, there would be a new $50,000 overall limit for certain gifts such as transfers to trusts or family limited partnerships. If enacted, the change would basically limit insurance trust planning through irrevocable life insurance trusts to $50,000 premiums—hitting big policies still needed to pay estate taxes.
Another troubling proposal would eliminate the tax basis step-up. Instead of getting a new increased date of death value for an asset, heirs would get the deceased person’s original basis. Say, for instance, your dad leaves you Microsoft stock he bought years ago for $10 per share. If the price when he died was $40 instead of the tax basis rising from $10 to $40, minimizing or eliminating any capital gain on a subsequent sale as is the case today, you would wind up paying tax on the $30 difference. (There would be a $100,000 exemption, so it doesn’t hit smaller estates.) This change would have huge ramifications for family businesses and real estate because many of these holdings have a very low tax basis relative to their value at the date of death. One of the other proposals would increase the top capital gains tax rate to 28%.
What should you do now? Take advantage of the current estate tax regime, which sets the top estate tax rate at 40%, and this year carries a $5.43 million per person estate and gift tax exemption, up from $5.34 million last year. Fund trusts for children or grandchildren. Use GRATs to transfer assets you believe will significantly appreciate in value. Set up your Life Insurance trust and make gifts to family.
Act now because you never know what proposal may actually get implemented.
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