Estate Tax Exemption Could Drop Again

The confusion over the federal estate tax exemption seemed to be over. Congress in 2013 passed the American Taxpayer Relief Act, which ended 12 years of uncertainty over how much one could pass down tax free.

That amount is $5.3 million per person or $10.6 million per couple during life or at death. Over that, there is a 40 percent tax.

Tax (Photo credit: 401(K) 2013)

But in his 2015 budget, President Obama would restore rates to their 2009 levels and end some popular tools that some individuals commonly use to shift assets to future generations, according to an article in Forbes.

The changes would go into effect in 2018 under the president’s proposal, which would reduce the exemption to $3.5 million per person. In addition, the during life exemption would be cut to $1 million. And the top tax rate for money over the exempted amount would rise to 45 percent.

While most of these changes are unlikely to ever go into effect, considering that Obama will have left office before 2018, there is a chance that some of the ideas could stay, the article says.

Particularly vulnerable are leveraging techniques — sophisticated estate planning strategies that place more into the lifetime exemption amount and minimize gift taxes owed.

One target is the annual exclusion gift to trusts. Now, you can give $14,000 per year to as many individuals as you want. A couple can give $28,000. But the money must be able to be used by the recipient right away. If you want to give the gift to a trust, you must get around the requirement that the money must be able to be used right away.

Usually, this is done by giving the beneficiary what are known as Crummey powers — the right for a limited time of a few months to withdraw the year’s gift from the trust.

The thought is that wealthy donors have abused Crummey powers by setting up trusts for multiple individuals and funding them each year with huge tax free gifts by allocating the annual exclusion amount to each beneficiary.

The new budget would eliminate the requirement that the gifts must be able to be used immediately and create instead a new category of transfers to entities, including trusts, that could not total more than $50,000 per year.

If you have questions about estate planning techniques, please feel free to call us at (626) 696-3145.

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