If there is no action from U.S Congress, in 2013 we will see significant changes in Federal Estate Tax, Gift and Generation Skipping Tax regulations under public law 111-312(December 17 2010).The estate tax shelter will go down from the current $5.120.000 to $1.000.000. Additionally, the maximum estate tax rate will revert to 55% as opposed to the 35% rate of 2012.

However, the Obama administration has proposed to restore the federal estate tax rates to the 2009 levels. This is a $3.500.000 shelter and a maximum rate of 45%. The gift tax shelter would remain in $1.000.000. Furthermore the portability provision allowed by current regulations will probably disappear. According to such provision, if one spouse dies and has not used his or her full estate tax exemption, then the unused portion of the exemption may be transferred to the surviving spouse

The situation with regards to estate tax for non-domiciled foreign citizens is expected to remain the same. These individuals are taxed on the value of their U.S “situs” assets, which include real and tangible property located in the U.S as well as stock of U.S corporations. The threshold for non-domiciled foreign citizens is only $60.000 and the rate range is the same as the citizens´ range. Some exceptions to these rules are provided for citizens of countries that have estate and gift tax treaties with the U.S. However, Colombia is not one of them.

There are some strategies to take advantage of the current law, which is expected to be more favorable than the coming regulations in 2013. Some American experts have recommended that as a consequence of the reduction in shelters and the increase in the rates, clients should consider strategies such as:

  • Dynasty trusts: These type of trusts allow assets to pass from one generation to the next without gift or estate taxes and at the same time can allow the beneficiaries to use the funds as per the trust´s instructions.
  • Trusts created by spouses for each other: Though some specific regulations and case law shall be followed, this strategy allows couples to make use of the current threshold and can also have the descendants as discretionary beneficiaries of the trust.

There are also other alternatives that do not require the clients to part with their wealth. It is possible to opt to use up the current Generation Skipping Tax exemption by creating marital trusts for one another in which the Trust property passes to another Trust for the beneficiaries after the spouses die. Other option is to allocate Generation Skipping Tax exemption to existing trusts. Such strategy, though more complex, consists in extending the duration of existing trusts.  

Finally, other changes expected to result in less favorable regulations include:

  • Valuation Discounts: The administration has proposed to reduce the valuation discounts that may be applied to the transfer of an interest in a family controlled entity.:
  • Grantor Retained Annuity Trusts: The proposal of the administration purports for stricter conditions for these types of trusts which in turn make such trusts less favorable in terms of gift tax efficiency.
  • Generation Skipping Tax Limitations: The administration has proposed to limit the time period for which a trust may be exempt of Generation Skipping Tax to 90 years.
  • Coordination of Income and Transfer Tax Rules for Grantor Trusts”: The assets of this kind of Trusts in which the Settlor is considered the owner of the assets for income tax purposes (and therefore pays the trust´s income tax), if the administration´s proposal is accepted, will be included in the settlors estate for estate tax purposes. Additionally, any distribution from that trust during the grantor´s life will be subject to gift tax.

Though there is still uncertainty as to where the U.S will stand with regards to Estate Tax, Gift and Generation Skipping Tax regulations in 2013, it is very probable that such ground is less favorable than the current. Therefore, affected people should review their situation and if need be, take appropriate measures.