New Budget Plan May Have Serious Effects on Estate Plans

Recently, President Obama released his proposed 2014 budget plan. As a recent article explains, financial advisers and estate planning attorneys have since been analyzing how the new plan will affect their clients.

Under the new budget plan, the federal estate tax will increase from 40 to 45 percent, and the individual exemption will decrease from $5.25 million to $3.5 million. The new budget plan does not allow adjustment for inflation. Essentially, this means that as inflation increases, more and more estates will meet or pass the individual exemption limit.

The new budget will also affect Grantor Retained Annuity Trusts (“GRAT”). Through a GRAT, a person can transfer assets to beneficiaries while still enjoying an income benefit from the asset(s). Under the proposed budget, GRATs would have a minimum term of 10 years. This would make it much more likely that the creator of the GRAT will die while the trust is still in existence. If this happens, the trust will be taxed as part of the creator’s estate, and has no tax-reducing benefit.

The proposed budget would also have an impact on Intentionally Defective Grantor Trusts (“IGDT”). These trusts allow the trust creator to freeze any appreciation on an asset for the purpose of taxes. In IGDTs, the trust creator’s assets can grow outside of his or her estate. Unfortunately, the IDGT would become obsolete under the proposed budget plan.

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