When Congress passed the American Taxpayer Relief Act of 2012 (“ATRA”) to avoid the “fiscal cliff,” a sense of stability was finally provided to the transfer tax system, which had been in a state of almost constant change for over a decade.  ATRA “permanently” fixed the amount of wealth that an individual may transfer free of estate or gift tax at $5,000,000, indexed for inflation, with a tax rate of 40%.

The Treasury Department recently released the General Explanation of the Administration’s Revenue Proposals for 2015 (colloquially known as the “Greenbook”).  Interestingly, many of the proposals are similar to those that the Administration proposed in prior years—before the passage of ATRA.

Despite the passage of ATRA, the Greenbook again includes proposed modifications for the transfer tax parameters to revert to 2009 law.  The exclusion for estate and generation-skipping taxes would be $3,500,000, not indexed for inflation.  The exclusion amount for gift tax would be $1,000,000.  The rate of tax would increase to 45%.  The proposal includes portability but in modified form from current law.

The Greenbook also contains a new proposal to change the structure of the law currently governing the annual exclusion. If enacted, the proposal could dramatically change the estate planning landscape.  Currently, a donor may exclude up to $14,000 per donee of annual gifts, as long as the donee has a present interest in the property.  The proposal in the Greenbook seeks to abolish the present interest requirement and change from a per donee focus to a maximum of $50,000 of gifts a donor may make in one year, regardless of the amount of donees.

To illustrate the proposed change to the annual exclusion consider the following examples:

  • Example 1: Under current law, Donor transfers $56,000 into a trust for the benefit of the donor’s four children. The trust document provides the appropriate withdrawal right for the four children and thus the $56,000 transfer is entirely shielded by the annual exclusion ($14,000 per child).
  • Example 2: Assume the same facts as Example 1 but the transfer is governed by the proposed change in the Greenbook.  Because the Donor exceeded the yearly threshold amount of $50,000, $6,000 of the gift is taxable.

In addition to the proposals discussed above, the following proposals changing the transfer tax system were again included in the 2015 version of the Greenbook:

  1. Valuation Consistency: the valuation of property for income tax basis must be the same as the valuation for estate tax purposes.
  2. GRATs: a minimum term of ten years would be imposed on GRATs and a maximum term of the life expectancy of the donor would be imposed.
  3. Duration of GST Exemption: the duration for the exemption provided in the generation-skipping tax would be limited to ninety years after the creation of the trust.
  4. Grantor Trusts: If a trust is treated as a grantor trust for income tax purposes, then the grantor will be treated as the owner for transfer tax purposes.

The chance that all of the proposed changes would become law is highly unlikely.  However, it is interesting that twelve months after signing into law provisions that permanently fixed the parameters of the transfer tax system, the President again presented a proposal to revert the law to pre-2009 levels.  Taxpayers should monitor the state of the law and stay in contact with their estate planning professionals.