The 2016 Obama budget has some real landmines hidden between the pages that will turn estate planning upside-down.
The “permanent” estate tax statutes signed into law by President Obama on Jan. 3, 2013, set the estate tax exemption at $5 million per person, indexed for inflation, and set the top estate tax rate at 40% -so this year the exemption is about $5.43 million. Now, only two years later, permanent may not be permanent after all. Here are some of the proposed changes:
Roll the estate tax exemption back to $3.5 million with no CPI raises, set lifetime gift tax exemptions to $1 million, and raise the top estate tax rate back to 45%. How in the world can any lawyer be expected to plan a client’s estate when the rules keep changing?
Other horrible ideas in the from of proposals would be to take away the step-up in basis for inherited property, set lifetime limits for gifts to a trust at $50,000 -which would kill the Crummy or ILIT (irrevocable life insurance trust), increase the capital gains tax to 28%, limit home mortgage deductions, eliminate the S corp payroll loophole (this is huge), killing IRA “stretching” to heirs, and many more. For more details, take a look at this Forbes article.
It is not likely a Republican Congress will let all of this go through unscathed. However, given the lack of backbone shown so far, there is a good chance some “compromising” may let much of this get enacted into law.
The overall message here is that you can never depend on this government to enact the stable laws that are required when you are trying to help clients through at least a twenty year estate planning timeline.