President Obama recently released his administration's budget for 2015. The budget includes various proposals that impact estate planning, some of which are new and some of which are restated from 2014′s budget proposals.
New proposals include the following:
1. Requiring a person who purchases an existing life insurance contract with a death benefit of $500,000 or more to report the purchase. In addition, the insurance company would have to report benefit payments.
2. Modifying the transfer-for-value rules by eliminating the exception for transfers to a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer, and adding an exception for a transfer to a partnership or corporation in which the insured is a 20% owner. The transfer-for-value rule generally states that if the owner of a life insurance policy sells the policy to another party, the amount of death benefit that is excluded from income tax at the transferor's death is limited to the value of the consideration received, plus any subsequent premiums that are paid into the policy by the recipient after the transfer. The rest of the death benefit is fully taxable as ordinary income.
3. Limiting to $50,000 per year the annual exclusion for gifts to most trusts, gifts of interests in passthrough entities, gifts of interests subject to a sales prohibition, and other transfers of property that cannot be liquidated immediately by the donee. This proposal would also eliminate the present interest requirement for gifts to qualify for the annual exclusion. In other words, no more Crummey letters to a beneficiary notifying them of their withdrawal right!
Restated proposals from the 2014 budget include the following:
1. Beginning in 2018, restoring the estate, gift, and GST tax rates and exemptions to 2009 levels. This would make the top rate 45%, with a $3.5 million estate and GST exemption and a $1 million gift tax exemption.
2. Requiring GRATs to have a minimum term of 10 years and not permitting "zeroed out" GRATs.
3. Eliminating a trust's GST exclusion on the trust's 90th anniversary.
4. Requiring that non-spouse beneficiaries of IRAs take inherited distributions over no more than 5 years.
5. Limiting contributions and accruals to qualified retirement plans to the amount that is sufficient to provide the maximum annuity permitted under the plan. Currently, this would cap tax-deferred retirement plans at $3.4 million.
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