02/19/2015

FY 2016 Budget Propsal Affecting Estate Planning

The Obama administration released the proposed Fiscal Year 2016 budget early in February, and there are a number of proposed changes that affect estate planning:

  • Return the estate, gift and generation skipping tax exemptions to that in effect in 2009.  At that point the estate tax exemption was $3.5 million, and the gift tax and generation skipping tax exemptions were $1 million each, none indexed for inflation.  The tax law enacted in early 2013 raised all three exemptions to $5 million, indexed for inflation, and brought in “portability” by which a married couple shares double the exemption available to one person.
  • End step-up in basis, and impose capital gains tax on appreciated inherited assets when they are later sold.  Currently, when someone dies, the assets in his estate are "stepped up" to reflect the current fair market value as of the date of death.  The appreciation over the price the decedent paid evaporates.
  • Require non-spouse beneficiaries of IRAs and 401ks to take distributions over a five year period, ending the “stretch IRA”.  Currently, required distributions from an inherited IRA canbe taken over the life expectancy of the beneficiary or some other defined life expectancy, almost always more than five years.

None of these proposals are new, and along with a few others aimed at preventing some sophisticated estate tax planning mechanisms, they have been featured in previous administration budget proposals.  The contentiousness that exists between the administration and the Republican-controlled Congress may insure that no action will be taken.  The 2013 tax law was passed in the face of an imminent and automatic return to a $1 million tax exemption.  The 2013 law permanently enacted the higher exemption, leaving no time pressure to drive more changes.