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Obama’s 2016 Budget — Estate Planning Overview

President Obama released his budget proposal yesterday (link here) and, although federal estate taxes are not addressed in the taxation section on pages 52-58, pages 121-122 contain the proposals.  Essentially, he proposes to “[r]estore the estate, gift, and generation- skipping transfer (GST) tax parameters in effect in 2009″ as well as restrict the use of some sophisticated planning tools that estate planning attorneys use to assist clients with potentially taxable estates to minimize their tax burden through planning.  The unified credit (sometimes called an exemption) — basically the amount you can gift tax-free during life and at death combined, minus some exceptions — was set at 5.25 million dollars starting in 2013.  Importantly, the amount was indexed to inflation, so it increases every year.  In 2015, the credit is 5.43 million dollars.  The President’s proposal is to rollback that amount to the 2009 level — $3.5 million dollars, not indexed to inflation.  The tax rate on any amount above the credit amount would remain the same — 40%.  The President estimates that these changes would generate over 214 billion dollars in additional revenue over the next ten years, with the bulk of the additional revenue — 189 billion dollars — from the reversion of the unified credit to the 2009 level.  Two items to note here:

1.  Although the 3.5 million dollar credit proposal still would be quite high and, therefore, would only affect those that were fairly well off, it would not be indexed to inflation.  Therefore, more people would fall into this category as time went on.

2.  It is highly unlikely that any of this will be enacted by the Republican-controlled Congress.  Therefore, as several commentators have noted, this proposal, which is the same as last year’s, is the President’s wish and may be a negotiating point to some of the more realistic goals that could gain some traction in Congress.  But I think the likelihood of any change in this area is nil.  Any change in this area will be quite difficult.  There is no sunset provision in the current law–it is permanent.  During the last big change in the law, there was pressure because of the sunset provision and the possibility of a drastic reduction in the credit amount.  Therefore, Congress was spurred to action.  Because of the permanent change, there will be no pressure and, consequently, no impetus for Congress to act.  The credit is safe for the foreseeable future.

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