February 14 of last month the Treasury Department released its explanations for the 2012 fiscal year revenue proposals. This also provided the President and his administrations thinking regarding estate tax laws and potential changes they anticipate or what will remain status quo. What they propose is:
- Returning the estate, gift, and generation skipping taxes to 2009 levels.
- Making portability permanent.
- Limiting the use of valuation discounts.
- Requiring estate tax value to be used as basis.
- Limiting GST exemption to 90 years.
- Imposing a minimum ten-year term on GRATs.
- Increasing Income Tax Rates
For 2011 and 2012, the estate and gift tax exemption is $5 million, and the estate and gift tax rate is 35 percent. The proposal is for 2013 exemption to return to $3.5 million for the estate tax, $1 million for the gift tax, and just over $1 million (inflation adjustments over the past dozen years) for the generation skipping tax.
However, this would essentially be an increase in estate and gift tax and the GOP who are more friendly to the idea of lower taxes have significant congressional weight following the 2010 elections. Many analysts question whether the President who would have liked those prosals for 2010 or 2011 will be able to make those changes.
Portability of the estate and gift tax exemption allows surviving spouses to use their predeceased spouse’s unused exemption, in addition to their own exemption, for gift and estate tax purposes. For example, if wife's estate only uses $1 million of her $5 million exemption in 2011, then her $4 million unused exemption may be used by her husband under the current portability provision so he could have $9 million estate tax exemption. The current portability provision is set to expire Dec 31 2012 but the administration seeks to make this permanent. While this has a decent chance of eventually being law, it cannot be relied on until it is a done deal and signed into law.
The Budget proposals also seek to have the individual income tax rates increase back to the pre-Bush 2001 tax cuts. The highest federal individual tax rate would increase to 39.6% and the 33% federal rate would increase to 36%. The federal long-term capital gain rate would increase from 15% to 20%.