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Effect of Presidential Budget on Estate Planning

Nothing about the law is every entirely static. Obviously legal rules and principles change over time. However, some practice areas are far more stable than others. For example, the general process to recover for personal injuries in a car accident are roughly the same now as in the past. At the other end of the spectrum, certain estate planning processes can change virtually every year. That is because much of this planning is centered on tax savings. In that way, it mirrors applicable tax rules, and any change in those rules requires changes in estate planning details.

Possible Changes
For example, consider the estate planning changes that may need to be made if the latest presidential budget proposals are enacted. Financial One recently shared information on those possible alterations. The President’s proposed 2013 budget includes some so-called “tax loophole” closings which may alter what planners do for future clients.

For one thing, “grantor annuity trusts” (GRATs) would be curtailed under the latest proposals. GRAT are often helpful in eliminating the gift tax costs of transferring assets to others. This works by creating a trust that is funded with an asset that will appreciate in value. The grantor retains the right to annuity interest for a set number of years with the remaining assets transferred to beneficiaries so long as the grantor is still alive.

As in now stands grantors can set up GRATs while collecting interest for as little as two years. However, the latest proposals would add risk into the mix by having a minimum of a ten year term with maximum life expectancy of annuitant plus ten years.

In addition, dynasty trusts may be affected by the President’s proposed budget. The story explains how these trusts are often used to transfer assets throughout generations without gift or estate tax penalties. However, the latest proposals would cap those benefits at 90 years, potentially limiting the value of the trust.

Importantly, these possible changes are not guaranteed. As with so many of these issues in recent years, everything ultimately depends on how the executive and legislative branches are able to hammer out any sort of compromise. At this point it is mostly a guessing game as to what will or will not make it into law.

Of course there is little that individual community members can do to influence these decisions. But at the very least it is important to be aware of potential changes and work with an estate planning attorney to understand what decisions are smart now in anticipation of possible changes in the future.

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