Families who have had to face the estate tax know that it can destabilize their family businesses and create major headaches for their children and grandchildren.
Unfortunately, for more than a decade it’s been nearly impossible for families to do informed planning with any solid understanding of what Washington’s future intentions may be. In fact, the only thing that has seemed certain and permanent in the estate tax world is the persistence of a situation that lacks any trace of certainty or permanency.
This challenging and unpredictable environment has made many families reluctant to take advantage of what could be a once-in-a-lifetime window of opportunity. Now is a key time for families to think creatively about preserving their wealth and carefully weigh their options.
Use it, or lose it
The 2010 Tax Act has lowered the estate, gift and generation-skipping transfer (GST) tax rates to their lowest point (35 percent) in 80 years and increased the exemption to an historic $5.12 million ($10.24 million per couple). Unfortunately, Congress was only able to agree on these parameters until the end of 2012. Absent further legislative action, the estate tax will automatically revert to pre-2001 levels in 2013, meaning a confiscatory 55 percent rate (up 20 percentage points) on all assets over $1 million (down $4.12 million). For many families, this means 2012 is an opportune time to “use it or lose it.”
On the menu: death taxes
As the two parties serve up differing visions of tax reform, death taxes are also on the menu. As Congress scavenges for revenue, many on Capitol Hill have their sights set on high-net-worth and high-income Americans. In the estate tax sphere, serious threats have emerged to legitimate planning techniques.
These proposed changes include making two-year rolling grantor retained annuity trusts (GRATs) and 100-year GRATs impossible, altering the tax treatment of grantor trusts and limiting the GST tax exemption to 90 years.
Some have even sought to turn the well-established economics of valuation on its head. Instead of valuing assets at what they’re worth, politicians have proposed ignoring restrictions on ownership (such as lack of marketability, liquidity and control) when determining a family’s estate tax liability. This change could lead to peculiarly distorted outcomes, as similar interests would be worth one amount to a family member, another amount to an unrelated party and an entirely different amount to the Internal Revenue Service.
In the current budgetary environment, the risk of these harmful revenue raisers is only increasing with time. Since most of these provisions have been proposed only prospectively, now could be the time to get GRAT, grantor trusts or dynasty trusts off the ground before Congress changes its mind and the rules of the game.
The presidential narrative
The future of the 2010 Tax Act isn’t likely to be determined until after the November elections in a lame duck session or when the new Congress is seated in 2013. Families are working with allies on Capitol Hill and in the family business community to minimize the potential for harmful outcomes and maximize the prospects for sustainable estate tax relief.
However, much will depend on the narrative and outcome of the upcoming presidential and congressional campaigns, any emerging lessons or political mandates related to tax policy and the resulting relative leverage of the parties. Regardless of whether Congress acts or how the politics shift, the bottom line for families is that now is the time to know and explore all the options, before they potentially disappear on Jan. 1.
Patricia M. Soldano is chair of the GenSpring Family Office’s western region which includes Phoenix. To learn more, visit www.genspring.com.