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Potential changes in estate, tax law leave wealthy scratching heads

When it comes to estate planning in 2012, one thing is for sure: it is difficult to know exactly how to plan. This is because of potential changes that are in store. As our readers may know, the current gift-estate tax lifetimes exemption amount will be dropping from over $5 million to $1 million in 2013, unless Congress determines otherwise. In addition, President Obama has proposed a new budget plan for 2013 that would effectively undo years of tax policy under which income and estate tax rules have been separate.

One practical effect of the new policy is that creators of trusts would have to include the assets of the trusts in their own estates for estate tax purposes. This means that many people and entities that set up trusts in order to avoid estate taxes on those assets will end up getting taxes on them anyway.

Under current law, transfers between a grantor-one who creates a trust-and a trust, no income tax is due, since the law treats the trust and the grantor as the same person. On top of that, estate tax law considers grantor trusts-those in which the grantor retains certain powers over administration of the trust-to be separate from the grantor, meaning there is no estate tax on trust assets when the grantor dies.

If Obama’s proposed budget goes through, however, these rules would change. It isn’t entirely clear how the proposal might be altered in the future, or how receptive Congress will be. Some say it isn’t likely to be passed this year.

In any case, estate planning for the wealthy is a tricky think at present, with so many big changes potentially taking place, or not. The best one can do is to work with an experienced and knowledgeable estate planning attorney who can help navigate the potential changes.

Source: Bloomberg, “Obama Estate Tax Budget Proposal Keeps Wealthy Jumpy,” Diana Freda, June 12, 2012