Obama Budget Proposal Estate Impact

Obama Budget Proposal Estate Impact

By: Martin M. Shenkman, CPA, MBA, JD

Obama Tax Proposals

By: Martin M. Shenkman, CPA, MBA, PFS, JD


President Obama released a 2011 fiscal year budget which includes some nasty stuff affecting folks with money trying to do estate planning. Here are a few:

Tax basis consistency.

Tax "basis" is generally the price you paid for property, plus the cost of improvements, less depreciation if applicable. Tax basis is used to determine gain or loss when property is sold. If you received property by gift, tax basis is generally the same as the person who gave it to you (called "carryover basis"). IRC Sec. 1015. If you inherit property the basis is generally the fair value of the property at death as reported for estate tax purposes. IRC Sec. 1014.

There have been abuses. For example, if someone gave you a gift that was worth less than the annual gift exclusion ($13,000 in 2010) no gift tax return would report the information to the IRS. Similarly, if someone bequeathed you property and their estate was less than the estate tax filing threshold ($3.5 million in 2010 assuming the estate tax is reinstated which is likely), no estate tax return has to be filed. If property was owned by you and the decedent jointly it passes to you by operation of law with no documentation necessarily required. How does the IRS know that you're fessing up to the real value? This Obama proposal would require that the basis of the property in the hands of the recipient be no greater than the value of that property as determined for estate or gift tax purposes (subject to subsequent adjustments). And to make sure this happens reporting requirements will be added. Executors (for estates) and donors (for lifetime gifts) will be required to provide the necessary information to both the recipient and the IRS. The Treasury Department will be given authority to issue tax regulations, so in the words of Captain Jean-Luc Picard to Commander Will Riker "Make It So, number 1," they'll make sure to cover the tax collector's back with guidelines as to the implementation and administration of these requirements.

Valuation Discounts

Gift, estate and GST tax rates are applied to the value of assets transferred above certain threshold amounts.

  • While taxpayers can't change the rates they pay, they can reduce tax if values are made lower. So contractual and other restrictions were created that reduced the value of assets. So it goes...
  • Congress enacted a number of provisions including Code Section 2704(b) that provides that certain restrictions be ignored in determining value (i.e., those restrictions not be considered so that the discounts in value they would otherwise support won't affect the value of the interests transferred by gift). The restrictions that were to be ignored included contractual restrictions that were more stringent than comparable restrictions under state law. Example: Billy Pilgrim set up a corporation and the shareholders' agreement provided that no shareholder could sell their shares for ten years the value of the shares would be reduced dramatically. But if state law provided that a dissenting shareholder had be paid fair value in six months the ten year restriction was ignored. So it goes...
  • Well, taxpayers couldn't change the federal tax laws, but gee, want not get states to enact restrictions that would support tax discounts. So it goes...
  • Gee, so the Obama proposal will provide that a new category of restrictions, called "disregarded restrictions" will be, well, "disregarded." Treasury will issue regulations identifying which restrictions will be ignored in valuing interests in family controlled entities if the ownership interests involved are transferred by bequest or gift to family. These will include interests that can be removed by family members and even charity. So it goes...

The reduction in discounts, long talked about, will impact a myriad of planning techniques and take the juice out of many deals that would have been quite effective prior to discounts. Alas, using grantor trust status to leverage gifts and other joyful tax techniques will likely become even more popular if the discount toy is taken off the game board.

These new rules will apply to transfers after the date of enactment if the restrictions were created after October 8, 1990, the date 2704 was first enacted.


Grantor retained annuity trusts have been a favored tool of the Rich and Famous. Just ask Robin Leach. Assets are given to a trust for a short say two year period. A very high annuity payment is paid back to the person setting up the trust ("grantor") that effectively makes the value of the GRAT zero for gift tax purposes. If the assets given beat a specified market interest rate, all that extra growth is out of the estate. No downside risk. The Obama proposal seeks to assure that taxpayers have a bit of skin in the game. So GRATs have to last a minimum of 10 years (increasing the mortality risk of the technique). GRATs might have to have something more than a zero gift tax value and the annuity payments may not be permitted to be decreased during the GRAT term.

GRATs will remain viable, but perhaps not for older taxpayers, and they just won't be as effective of as much fun.

These restrictions are to be effective from the date of enactment.


Better get it while you can. There's tougher times brewing for those seeking to reduce estate taxes (assuming reinstatement). The window on some techniques is closing fast. But unfortunatley, given the present state of the law -- estate and GST taxes have been repealed and replaced by a carry over basis regime, none of which any expects to remain law, planning during the remaining days of this "window" are not simple, certain or easy.

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