Editor’s Note: Carrie B. Cline is a member of the Trusts and Estates Practice Group at Ward and Smith, P.A.

In February 2012, the Treasury Department released its “General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals” (commonly referred to as the “Greenbook”). The Greenbook is President Obama’s proposed federal budget for 2013, and it includes a number of recommended changes to the current federal wealth transfer tax laws. This article summarizes some of those proposed changes and highlights planning opportunities that you should consider before year-end.

Estate Tax

• Current Law. The estate tax exemption for 2012 is $5,120,000, meaning that for individuals who die this year, the first $5,120,000 of their estate will pass free of any tax. Absent any deductions, their assets in excess of the exemption amount will be subject to federal estate tax at a 35% rate. However, without extension legislation, these laws will expire at the end of 2012, at which time the estate tax exemption will fall to $1,000,000, and the federal estate tax rate will rise to 55%.

• Proposed Changes. The President suggests that the estate tax exemption be set at $3,500,000 and the estate tax rate be set at 45%. While the proposed changes are not as taxpayer-friendly as our present laws, they would be an improvement over the laws that are scheduled to take effect January 1, 2013. Many believe that Congress will take action to keep the current federal transfer tax laws in place, but there can be no guarantee in this regard.

Gift Tax

• Current Law. The gift tax exemption presently matches the estate tax exemption, meaning you can make up to $5,120,000 in lifetime gifts without triggering the gift tax. (Those lifetime gifts, however, will reduce the amount that you can leave free of estate tax at death.) Gifts in excess of the exemption will be subject to tax at a 35% rate. Absent extension legislation, these laws will also expire at year-end, and the gift tax exemption and tax rates for 2013 and beyond will mirror the estate tax exemption and rates.

• Proposed Changes. The President’s 2013 budget proposal would end unification of the gift and estate tax laws and, at the same time, curtail taxpayers’ ability to make lifetime gifts by lowering the gift tax exemption to $1,000,000 and raising the gift tax rate to 45%. As a result of either the transfer tax laws scheduled to take effect in 2013 or the President’s budget proposal, you should consider making significant gifts during 2012 to take advantage of the higher exemption amounts and lower tax rate. This strategy is advantageous because gifting allows future appreciation of the gifted asset to occur outside of your taxable estate – thus avoiding estate tax when you pass away.

Generation-Skipping Transfer (“GST”) Tax

• Current Law. The GST tax is imposed on certain transfers benefiting generations more than once removed from you. During 2012, the tax applies only to GST transfers in excess of $5,120,000 and at a rate of 35%. Without extension legislation, beginning in 2013, the tax will apply to GST transfers in excess of $1,000,000, as indexed for inflation, and at a rate of 55%.

• Proposed Changes. The President advocates application of the GST tax to transfers in excess of $3,500,000 and at a rate of 45%. Although there is hope that Congress will extend the current GST laws, there is no assurance this will occur, which makes significant lifetime gifts – either outright or in trust for younger generations – attractive before year-end.

Portability of Estate and Gift Tax Exemptions

• Current Law. If you or your spouse dies during 2011 or 2012, the deceased spouse’s unused estate and gift (but not GST) tax exemptions can be added to the surviving spouse’s exemptions. However, absent extension legislation, these portability provisions will not apply after 2012.

• Proposed Changes. The President’s 2013 budget proposal would make the portability provisions permanent.

Grantor Trusts

• Current Law. When you establish a grantor trust, you retain certain powers, which results in you and the trust being treated as a single entity for income tax purposes. As a result, your payment of income tax allows the value of the trust’s assets to grow tax-free. This estate planning technique is popular because a transfer of assets to a grantor trust is a completed gift, so that the assets, along with any future appreciation of those assets, are removed from the grantor’s estate.

• Proposed Changes. The President would curb the effectiveness of grantor trusts by requiring that the entire value of the trust – the initial value of the assets and the future appreciation thereon – be included in the grantor’s estate and subject to the lower exemption amount and the higher tax rate addressed above. The proposed changes would apply only to grantor trusts created on or after the date the rules are changed. For this reason, a gift of assets to a grantor trust during 2012 may be an attractive planning opportunity for you.

Grantor Retained Annuity Trusts (“GRATs”)

• Current Laws. A GRAT permits you to retain the right to receive annuity payments from the trust over a term, after which the remaining assets will pass to the named beneficiaries of the trust. Currently, only a two-year minimum term is required. You must survive the term or the trust assets will be included in your estate. Typically, the annuity payments are structured to reduce the value of the remainder interest of the trust assets, so there will be little or no gift tax due upon establishing the GRAT.

• Proposed Changes. The President’s 2013 budget proposal would require a ten-year minimum term, which may greatly limit the benefit of a GRAT. Moreover, you would be compelled to make a taxable gift upon establishing the GRAT, which would also limit this technique’s attractiveness. Given these proposed changes and the currently low interest rate environment, now may be a good time for you to take advantage of this planning technique.

Valuation Discounts

• Current Law. Many taxpayers use closely-held entities, like limited liability companies (“LLCs”), to discount assets before transferring them to family members (or to trusts for the benefit of family members). For example, you may place marketable securities in an LLC and sell or give away a portion of the LLC ownership interests. The value of the gift of the LLC interests will be discounted for lack of control and lack of marketability because they cannot be readily sold. The discounts would minimize your tax costs of transferring the assets.

• Proposed Changes. The IRS frequently disputes valuation discounts, and the President would further limit them. Although the President’s proposal does not include specifics as to how discounts will be curtailed, he recommends that any curtailment apply retroactively to October 8, 1990.


The convergence of scheduled changes and the President’s proposed modifications to the transfer tax laws could limit your opportunities for future estate planning. If you act during the remaining months of 2012, you can potentially achieve long-term savings for your family that may not be available thereafter.

© 2012 Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Carrie B. Cline practices in the Firm’s Trusts and Estates Practice Group. Comments or questions may be sent to cbc@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.