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Posted by: Maricopa Lawyers on Apr 10, 2013

The American Taxpayer Relief Act of 2012 did not make many alterations to wealth planners’ estate planning practices but the White House budget for 2013 and comments by congress suggest that there will be changes that could close important estate loopholes.

After ATRA was passed on January 1st of this year both the Senate and House have hinted that rules made permanent by the law may actually be temporary. Barack Obama’s 2013 budget proposal would regulate estate planning techniques more harshly as a way to avoid “tax loopholes”.

ATRA does not mention the practice of grantor retained annuity trusts, which let individuals transfer wealth while limiting the gift tax cost of transfer. The White House’s budget proposal would institute tough restrictions on these.

In a GRAT, the grantor pays into an irrevocable trust with assets that are likely to increase in value, and retains an annuity for a number of years. If after a period, the assets left in the trust are transferred to beneficiaries.  The greater the value of the assets in the trust the greater the tax breaks the estate can reap.

The President’s proposal would make it mandatory that a GRAT have a minimum 10-year minimum term and a maximum term of the grantor’s life expectancy plus ten additional years. As it stands right now the minimum for a GRAT sits at two years.  Under the new proposal grantors run a higher risk of dying during the term of the GRAT, eliminating the benefit of gift tax savings.

Additionally, the proposal the value for estate and income tax purposes would have to be standardized. The property’s use in the hands of the beneficiary would be no greater than its value determined for estate and gift tax purposes.

GRAT’s allow for grantors to make gifts to beneficiaries free of gift tax by paying the trust’s income tax liability.