Estate Tax Proposed Changes for 2015 and Beyond

By Richard J. Nickels President Obama will deliver his State of the Union address today at 8 p.m. CT.  Given the weighty foreign and domestic issues confronting the Union, proposed changes to the estate tax will most likely not make it into the address.  A couple of changes that may occur soon are discussed below. For the last couple of years, there has been a welcome certainty in the federal estate, gift and generation skipping transfer tax law (collectively the “estate tax”).  That may soon change.  The General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals (colloquially called the “Green Book”) contains a number of recommended estate tax changes.  Most are intended to increase revenue. Below is a summary of two key estate tax proposals contained in the Green Book:

  •  • Applicable Exclusion Amount Reduction and Rate Increase – President Obama’s Administration proposes a decrease in the applicable exclusion amount and an increase in the highest marginal estate tax. The applicable exclusion amount is the amount that a person can give to children and grandchildren without paying estate tax.  The American Taxpayer Relief Act of 2012 fixed the amount at $5,000,000, indexed for inflation.  This year, the applicable exclusion amount is $5,430,000.  The highest marginal estate tax rate equals 40 percent.

As set forth in the Green Book, the Administration proposes a reduction in the applicable exclusion amount to $3,500,000 and an increase in the top tax rate to 45 percent.  Also, the applicable exclusion amount for lifetime gifts would be limited to $1,000,000.  There would be no indexing for inflation.  Portability would remain intact.  The changes would take effect in 2018.

  • Annual Exclusion Amount Cap – The Green Book contains a proposal ostensibly intended to simplify the rules surrounding annual exclusion gifts. In general, a person can give away $14,000 per year per donee and not incur estate tax.  These types of gifts are known as annual exclusion gifts.  A husband and wife can each give $14,000 to a done, or one spouse can give $28,000 to each donee if the other spouse consents to have the gift made by his or her spouse deemed to be given halfby each spouse.  This is known as a split-gift election.  Annual exclusion gifts do not consume any part of an individual’s applicable exclusion amount.  In order to qualify for annual exclusion treatment, the gift must be a gift of a present interest.  This means that the donee must have the right to the immediate use and enjoyment of the gifted property.  Transfers in trusts qualify as present interest gifts if the beneficiary has what is known as a “Crummey” power, which is essentially a right to withdraw the gifted property from the trust for a short period of time, typically 30 days.

The Obama Administration proposes to eliminate the present interest requirement for annual exclusion gifts.  Its elimination should simplify how trusts are drafted and administered.  However, as part of the proposal, the Administration also proposes a $50,000 cap on annual exclusion gifts.  Annual exclusion gifts in excess of $50,000 per year would be taxable.  The proposed change would effectively limit to 3 the number of donees that could receive the full $14,000 annual exclusion amount ($50,000/$14,000=3.57).  The changes would take effect for gifts made after the year of enactment.