1.
Beginning in 2018, the estate and generation
skipping transfer tax exemptions would decrease to $3.5 million and the gift
tax exemption to $1.0 million, and the tax rate would increase to 45%. These are the exemptions and tax rate that
existed in 2009. In addition, the
exemption amounts would no longer be indexed for inflation. Portability of unused estate and gift tax
exclusions between spouses would be retained.
These changes are being proposed only three months after the American
Taxpayer Relief Act of 2012 had “permanently” increased the exemptions to $5.25
million (as indexed for inflation) and had “permanently” set the tax rate at 40%! The proposal does not claw back any tax
benefits for gifts above the proposed $1 million gift exemption made before
2018.
2.
Effective for transfers on or after the date of
enactment, the income tax basis of inherited property could be no
greater than the value of property for estate or gift tax purposes. A new information reporting requirement will
cause the estate executor or the donor to provide the necessary valuation and
basis information to both the property recipient and the IRS.
3.
For grantor-retained annuity trusts (GRATs)
created after the date of enactment, the GRAT term must be no shorter than 10
years or longer than the life expectancy of the annuitant plus ten years. The remainder interest must have a value
greater than zero when the GRAT is established.
In addition, the GRAT annuity may not decrease during the term of the
GRAT. These proposals eliminate the
benefits of the so-called short-term, zeroed-out GRAT.
4.
For trusts created after the date of enactment,
and for additions made to pre-existing trusts after that date, eliminate any generation
skipping transfer tax (GST) exclusion allocated to the trust on the 90th
anniversary of the trust’s creation. It is unclear how the 90-year limitation applies to an addition to a grandfathered trust. This proposal effectively eliminates the
future use of the dynasty trust strategy.
5.
For property sold to an intentionally defective
grantor trust on or after the date of enactment, the portion of the trust
attributable to such property (including all retained income, appreciation, and
reinvestment) will be included in the gross estate, less any payments
received. In addition, if the trust
ceases to be classified as a grantor trust during the grantor’s life, then the
amount will be treated as a gift with the gift tax being paid by the
trust. Any distributions out of the
trust in excess of the prior taxable gift amount will be treated as additional
gifts.
6.
The exclusion from GST tax will be eliminated
for health and education exclusion trusts (HEETs) created after the date of
introduction of the bill proposing this change, and for transfers to existing
HEETs after that date. A HEET is used to
pay providers of medical care and to pay schools for tuition costs of trust
beneficiaries, which can include multiple generations. Direct payments to providers by an individual
for another person's medical or tuition costs are gifts that are excludable from GST
tax. The purpose of a HEET is to permit
the GST exclusion to apply to such payments made for future trust beneficiaries, even after the death of the trustor.
This proposal eliminates the HEET GST exclusion tax benefit.
