On April 10, President Obama released his fiscal year 2014 budget proposal. The proposal includes numerous changes to the law that would create greater exposure to estate, gift and generation-skipping transfer (GST) taxes. In this article, we address the following proposed changes: (1) restoring the estate, gift and GST tax parameters in effect in 2009; (2) limiting the duration of the GST tax exemption; (3) eliminating the beneficial GST tax treatment of HEETs (health and education exclusion trusts); (4) adding limitations on GRATs (grantor retained annuity trusts); and (5) coordinating certain income and transfer tax rules applicable to grantor trusts. Except as otherwise noted below, the proposals would generally apply for tax years beginning after December 31.
Restoration of the Estate, Gift and GST Tax Parameters
After years of change and much uncertainty, many Americans thought that the estate and gift tax laws had finally reached a state of normalcy when the president signed into law the American Taxpayer Relief Act of 2012 (ATRA) on January 2. The ATRA enacted a so-called "permanent" $5 million (indexed for inflation after 2011) exemption amount for the estate, gift and GST taxes (equal to $5.25 million in 2013, as adjusted for inflation), with a top tax rate of 40 percent. Although these laws are "permanent" by their specific terms (unlike the prior set of laws that had a built-in expiration date), the president’s 2014 budget proposal now seeks a return to the 2009 transfer tax laws, beginning in 2018. This means that the estate and GST tax exemptions would be reset at $3.5 million, and the gift tax exemption would be decreased to only $1 million, without adjustment for inflation, in any case. The top tax rate would be increased to 45 percent (which remains better than the 55 percent rate under prior law).
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