Tuesday, May 12, 2009

Fine print on the Obama estate tax proposals

JLM issued a flash on Obama's estate tax proposal here. In the comments, I expressed skepticism about the revenue scoring, and it turns out there is more to the story.

The first item is indeed to require consistency in estate, gift and income tax reporting, which I don't see as a change from current law. However, there will be new reporting requirements, which should make enforcement more consistent. However, this piece only raises $1.87 billion over ten years. Even that seems high.

More significant, the third item would impose a ten-year minimum term for a Grantor Retained Annuity Trust. Treasury wants to "crack down" on two-year zeroed-out GRATs, which are ways to play the transfer tax lottery without risk. A ten-year term definitely would put a survival risk into the equation. This proposal raises $3.25 billion over ten years. I still wonder how they develop that number—presumably it's the new estate tax revenue because GRATs no longer will be created?

But the real money is in the second item on the list, at more than $19 billion over ten years. We already have in the tax code IRC §2701 to 2704 to prevent the claiming of valuation discounts for certain intrafamily transfers. However, the Treasury reports that wiley taxpayers have figured out ways around these restrictions, so a new group would be added. The proposal would create a whole new category of restrictions to be ignored in valuing an interest in a family-controlled entity. Appropriately, they will be called "disregarded restrictions."

Family Limited Partnerships are the target of this change.

The President's budget also freezes the 45% tax rate and $3.5 million exemption of 2009. Somehow, that freeze will cost $483 million in 2009! How can that be? The freeze gains a scant $3 billion in 2010, the year when there was to be no federal estate tax at all. Seems way low. Then the freeze starts to lose big money, because it is compared to the return to the $1 million exemption and 55% top rate of the Clinton years. In 2015, for example, this change will cost $24.8 billion! That is, just the lost federal estate tax on amounts between $1 million and $3.5 million, plus the additional 10 points on the top rate, will in that year be more than 7 times the entire estate tax collected in 2010!

The Obama administration must be expecting a great many deaths of very rich people that year.

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