Obama’s 2014 Revenue Proposal
President Obama’s administration released its fiscal year 2014 revenue proposals (the “Proposal”). The Proposal has many provisions that affect both the individual taxpayer and Trusts and Estates. The following is a brief synopsis of the important provisions.
(1) Individual Retirement Accounts (“IRAs”).
(a) Allow owners of traditional IRAs and qualified plans (collectively “retirement plans”) that own less than 5% of the employer to postpone minimum required distributions (MRDs) until retirement, as opposed to the current requirement that all owners take MRDs at age 70 and ½.
(b) Exempt owners of retirement plans from having to take MRDs if the aggregate value of their retirement plans does not exceed $75,000 with a phase in for owners of retirement plans with aggregate values between $75,000 and $85,000.
(2) Inherited Retirement Plans.
(a) Participant, owner or spouse can take distributions from a retirement plan and roll them over into another retirement plan within 60 days, with no exemption for a non-owner or non-spouse from the trustee to trustee transfer rules for roll overs.
(b) Non-spouse beneficiary of retirement plans must take the distributions over no more than five years with exceptions for non-spouse beneficiaries of retirement plans that are disabled, chronically ill, not more than 10 years younger than the owner or a minor child.
(3) Limitations of contributions to retirement plans to an aggregate of $205,000 per year for each taxpayer.
(4) Estate, Gift and GST tax provisions.
(a) Restoration of the 2009 estate, gift and GST tax provisions in 2018, which would be an estate tax exclusion amount of $3.5 million dollars, a gift tax exclusion of $1 million dollars, a GST tax exemption of $3.5 million dollars and the top tax rate would remain at 40%.
(b) Retain portability and ensure no clawback provisions.
(c) The maximum term a GST exempt trust can last will be 90 years (at which time the inclusion ratio will become one) as opposed to being determined by the state laws. Currently a Florida GST tax exempt trust can last for 360 years.
(d) The exclusion from GST tax will not apply to health and education exclusion trusts.
(e) Terminate the current benefits of a sale of an appreciated asset to an intentionally defective grantor trust (“IDGT”), which allows the taxpayer to sell an asset and not recognize the gain. A taxpayer can create an IDGT that is a completed gift (not included in their estate at death) and continue to pay the income taxes of the IDGT at the taxpayer’s personal tax rates. Under the Proposal, the portion of the IDGT attributable to the property sold to the IDGT (and any appreciation) will be includable in the grantor’s estate upon death. Further, if the IDGT ceases to be a grantor trust during the grantor’s lifetime the amount attributable to the sale will be a gift.
(f) Require a minimum term of 10 years for a GRAT and a maximum term of the life expectancy of the annuitant plus 10 years. The GRAT cannot have a remainder interest of zero.
REMEMBER: While these provisions are merely proposals it is interesting to see the way the President is looking at tax planning techniques. It may be advisable to discuss alternatives for your personal estate planning documents with your attorney and CPA in lieu of the potential changes in tax laws. You also should contact your attorney or CPA to complete these techniques before any changes become law.