Obama's Estate Tax Pays Health Care Bill, Valuation Discount Changes

Rocco Beatrice
August 10, 2009 — 1,219 views  
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On May 11, 2009, the Treasury Department released its Green Book for the year. It is titled General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals. Included in this are the proposed tax increases by President Obama, which will be used to pay for healthcare. These tax hikes include an additional $24 billion in gift and estate taxes over the next ten years. Obama's plans are lofty and because of the consequential increases in taxes and tax rates you should plan or at least contemplate on asset protection with an irrevocable trust to avoid the estate taxes which is the tax that can be avoided. If you're planning for retirement (which we all should be) then additional tax efficient products should be included in the mix such as the Roth IRA or Roth on RoidsTM. There is no need to panic yet, as these are just proposals. The increase needs to be approved by Congress.

Obama's proposals make no mention of changes in the amount relating to the estate tax exemption. Those will remain the same. To exemplify this, consider leaving a $3.5 million estate in 2009 and paying no estate tax. As of right now, the tax would disappear in 2010, on January 1 and a year later, it will revert to what it was in 2001. Should the tax laws revert back to the 2001 rates you would have to pay taxes as high as 55% on any estate that is greater than $600,000.

The current law relating to valuation discounts state that if, upon your death or while you are living, you transfer any property to another person; you pay an estate or gift tax that is based on the value of the property unless it is protected in a Roth IRA or irrevocable trust. If the value is low, you will pay a lower tax. An estate freeze is a technique that is used to try to reduce the taxable value of the property you are giving to another, without reducing the economic value. Over the past few years, there have been many changes to the tax law that makes the use of estate freezes less attractive. This was because applicable restrictions were being ignored. These restrictions justify valuation discounts based on a lack of marketability and control. They typically apply to any interests that are in a family business which are then given to other family members. Appraisers ignore the restrictions, which results in having a higher taxable value for the family member than it would be for someone outside of the family.

Due to changes in state laws, many restrictions are not applicable restrictions any longer. Congress chose to make changes that would discourage estate freezes and other discount techniques, but these changes do not have the same impact as they once did. The IRS has identified alternative arrangements that are designed to avoid these laws.

The new proposal will create a new restriction category, known as disregarded restrictions. These will apply if you or members of your family can remove the restriction after the transfer has been made. Now you will have to value the interest based on the assumptions that the IRS will provide in regulations down the road. Disregarded restrictions would include any limitation on a transferee's ability to be admitted as a full partner and limitations on the holder's right to liquidate interest.

The new proposal will create a rule that states that certain interests that are held by non-family members will be treated as owned by the family. The IRS could devise regulations that will create ways to avoid the new rules and it could also make significant changes that will affect how the proposal will interact with any marital or charitable deductions. These new changes will increase taxes by $19 billion.

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Rocco Beatrice