Washington’s New Proposal on Estate and Gift Tax

President Obama recently released his 2013 proposed budget.  Significant estate and gift tax changes would go into effect on January 1, 2013, if the 2013 budget is passed by Congress.  A couple of the changes have fairly far-reaching implications for a significant portion of the American population.  Following is a description of a few of those changes that could greatly impact your estate plan.

Exemptions Level: In late 2010, Congress increased the estate tax exemption to $5 million for each person in the United States and reduced the highest estate tax rate to 35% of someone’s assets over $5 million.  The President’s budget lowers that $5 million exemption to $3.5 million and increases the maximum tax rate for estate and gift transfers exceeding the $3.5 million from 35 percent to 45 percent.  Currently an individual could transfer $5 million tax free.  If the President budget passes, that same individual could only transfer $3.5 million tax free.

Portability:  In 2011, Congress enacted a new “portability” provision that allows a spouse to utilize their deceased spouse’s estate tax exemption.  This is the first time in U.S. history that such a provision has been enacted, and President Obama’s budget introduced last week makes the portability rules permanent.  Because this provision is one that the Republicans also favor, we believe it is likely to pass through Congress.

Valuation Discounts: Finally, the budget makes significant changes to the way that business interests and real property held and transferred among family members is valued.  Until now, families creating family businesses could utilize valuation “discounts” on the transfers of certain business interests.  This is more frequently seen in the context of a Family Limited Partnership.  By utilizing the valuation discounts, families have been able to transfer larger assets without paying gift and estate taxes.  Under the budget proposed last week, the valuation discounts would be effectively eliminated, denying family members the ability to discount minority interest in family-owed businesses, family limited partnerships, and certain real property due to lack of marketability.  This a radical shift that could be incredibly detrimental to a huge number of Americans.

If you have additional questions about the new federal estate and gift tax laws and how they could effect your estate plan contact Ford + Mathiason LLP today for a consultation.