In our previous post, we began looking at how current proposals to cut spending and increase revenue could affect important estate planning tools. Last time, we looked specifically at how grantor retained annuity trusts could be affected, and we began to speak about intentionally defective grantor trusts.
Because these trusts allow the grantor to pay income taxes on the appreciated value of the trust assets, instead of the trust itself paying those taxes, grantors can transfer more wealth to their beneficiaries and get more assets out of their estate.
However, the current proposal would require that gift tax be paid whenever any distribution from an intentionally defective grantor trust is made and that any value remaining at the grantor's death be included in the estate for purposes of estate tax. The proposal would basically eliminate the purpose of forming such a trust.
A third type of trust that could be affected is the generation-skipping transfer tax-exempt dynasty trust. These trusts, which are irrevocable, allow grantors to pass on wealth to future generations without getting hit by the generation-skipping transfer tax. Although some states place limitations on the duration of these trusts, the tax savings can be great.
The Obama administration's current proposal, though, would impose transfer taxes after a dynasty trust has been in existence for 90 years. This wouldn't totally take away the incentive to form these trusts, but would do away with current rules allow such trusts to go on indefinitely.
The bottom line with all this is that, if the current proposal goes forward, people will need to reevaluate their estate plans if they are using any of these strategies-or any of the others that could be affected. The best way to keep on the ball is to work with an experienced attorney who is keeping up on this area of law.
Source: Lifehealthpro, "Budget proposal targets estate planning tools," Robert Bloink & William H. Byrnes," April 8, 2013