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Charles B. Jones’ Comments on the “Green Book”

The President’s budget proposals include some pretty scary ideas that readers should keep in mind.  For a link to those proposals please visit:  (Commonly referred to as the “Green Book”).  The Green Book is 300 pages long and there are many proposals which we have not identified here, some directly impacting estate planning.  Most of the proposals are described by using a euphemism such as “modify”, “simplify”, and “consistency”.  In truth, the proposals, despite the prose, are all about raising revenue by eliminating tools used by tax planning advisors.  In the words of Will Rogers, “Be thankful we’re not getting all the government we’re paying for.”

For purposes of this blog, below are those proposals which affect estate and gift tax planning and are categorized as follows with page numbers from the Green Book for your cross reference:

1.  Life Insurance:

A.  Requiring that a person who purchases an existing interest in a life insurance policy of greater than $500,000 to report such purchase and the payment of the death benefits. This proposal will curtail the use of life settlement contracts by corporations and partnerships when “company” owned life insurance is sold to a third party to recoup the cost of insurance on a retiring officer or partner and reinvest in the company. An exception is made for owners of greater than 20%. See page 102.

2.  Gift, Estate, and Generation Skipping Tax Rates:

A.  The tax rates effective for gifts and estates and the exemption would revert to the 2009 levels: $1MM gift tax exemption; $3.5MM estate tax exemption and a 45% top marginal rate for gift, estate, generation skipping purposes all starting in 2016.  See page 193.

B.  The proposal also suggests limits on annual exclusion gifts to a maximum of $50,000 for gifts of assets that cannot be immediately liquidated by the one. Currently, each donor is allowed a $14,000 annual exclusion for each one.  The effect of this proposal will be to limit the amount of assets transferrable by the more senior generation to the junior generation without the application of gift or estate tax. See page 204.

3.  Grantor Retained Annuity Trusts:

A.  GRATS should be limited to a minimum of 10 years and have a minimum taxable gift component of the greater of $500,000 or 25% of the initial value of the assets transferred at the time the GRAT is established. This proposal eliminates the effectiveness of estate freezes.  See pages 197-98.

B.  Sales to Intentionally Defective Grantor Trusts (IDGT) shall be treated as incomplete for gift and estate tax purposes. The effect of this proposal is that the estate freeze aspect of this tool will be eliminated, meaning frankly, the use of the tool has been made obsolete.  See pages 197-98.

4.  Generation Skipping Trusts:

A.  The proposal limits to 90 years the maximum length of time that a family trust can run and not be subject to generation skipping transfer tax. The administration is attempting to override state laws governing when interests in trust must vest.  State laws vary greatly with some indicating that no vesting is required, others give limits by a number of years.  The effect will be to limit the number of generations that a grantor can benefit without having to pay a second level estate tax (the generation skipping transfer tax).  See page 200.

B.  The proposal limits the use of a tool called the “HEET” trust. A HEET provides for the medical expenses and tuition of multiple generations of descendants. Taxpayers using this technique take the position that section 2611(b)(1) exempts these trust distributions from generation skipping transfer (GST) tax (generally, in perpetuity) because the distributions are used for the payment of medical care expenses and tuition. The substantial amounts contributed to HEETs will appreciate in these trusts, and taxpayers claim that no estate, gift, or GST tax ever will be incurred after the initial funding of these trusts. The proposal would provide that the exclusion from the definition of a GST under section 2611(b)(1) applies only to a payment by a donor directly to the provider of medical care or to the school in payment of tuition and not to trust distributions, even if for those same purposes.  See page 203.

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