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Obama administration proposals could affect important estate planning tools, P.1

The American Taxpayer Relief Act, passed not too long ago by Congress, was able to provide a measure of certainty for estate planners with respect to tax planning, but there is still uncertainty ahead because of political debates over government spending and revenue generation. Depending on the way lawmakers choose to tackle the problem, certain estate planning tools may be targeted.

One estate planning tool that could take a hit is the grantor retained annuity trust (GRAT). These trusts allow grantors to transfer assets out of their estate and to retain an income interest received as an annuity payment. Trust assets are distributed to beneficiaries at the end of the trust term. These trusts are usually set up over a short period of time and funded with assets that are likely to appreciate in value, allowing the grantor to minimize transfer taxes while passing wealth on to beneficiaries.

Now, however, lawmakers are proposing to require a minimum trust term of 10 years, which would increase the possibility that the grantor will die during the trust term, requiring the trust assets to be included in his or her estate. The proposal would also get rid of the ability of grantors to form GRATs that “zero out.” Such a change would require that some gift tax be paid when any such trust is created.

Another estate planning tool that could be targeted is the intentionally defective grantor trust. These trusts are useful in that the can allow grantors to exclude the value of trust assets from their estate. In our next post, we’ll take a look at how the current proposal could affect these trusts, as well as another type of trust in use.

Source: Lifehealthpro, “Budget proposal targets estate planning tools,” Robert Bloink & William H. Byrnes,” April 8, 2013