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I wanted to re-post this article that I received from Roccy DeFrancesco earlier this week. This article (written by Jim Duggan) does a great job explaining where the estate tax debates are currently and who is (or is not) responsible for changes with the current creation of the Super Committee.

Roccy DeFrancesco, JD, CWPP™, CAPP™, or CMP™
Founder, The Wealth Preservation Institute
269-216-9978

The Super Committee's Not-so-Super Rumor
By: Jim Duggan, JD, MBA
www.dugganbertsch.com

The Congressional Joint Select Committee on Deficit Reduction (known as the "Super Committee"), is tasked with the challenge of finding an acceptable bipartisan solution to our nation’s current deficit. The Super Committee is scheduled to provide its deficit reduction proposal on November 23, 2011.

The proposal is expected to include both expense reduction and revenue generation components to attack the problem. While originally not a part of the discussions, it appears that certain changes to the estate tax exemptions are now being considered. Specifically, multiple sources are reporting that the Super Committee is considering whether to reduce the current estate and gift tax exemption amounts.

Under current federal law, each taxpayer is entitled to transfer $5M of assets – either during one’s lifetime or at death – free of tax. As drafted, this $5M exemption is only temporary as it is actually scheduled to revert back to $1M in 2013. There is increasing “noise” that the Super Committee is seeking to end the $5M exemption and expedite the reversion to the lower $1M exemption amount. The accuracy of these claims, as well as the timing, is unknown, but here are a few possibilities:

1. The Super Committee does nothing with the exemption. At this point, most feel that the Super Committee is unlikely to include any such provisions in its proposal given the relatively insignificant revenue increase related to the change, as well as the possibility that such a provision could jeopardize the entire bill. As structured, the Super Committee’s bill must be voted on and passed without modification, and this could be a particular sticking point since the $5M exemption amount was just agreed upon in December of last year.
2. The Super Committee does propose a reduction in the lifetime gift and death exemption amount. If a reduction is proposed, the amount may be any number less than $5M; however, $1M seems to be the figure most discussed at this point in time as it would simply expedite the number already expected from prior legislation.
3. If the exemption is indeed reduced, the date such reduction will become effective will generally be one of the following options: a) the date the Super Committee announces it, b) the date the proposal is actually enacted, or c) a future date specified in the legislation. At this point, it does not appear that a retroactive date (such as 1/1/11) is being considered. The main concern, of course, is the possibility of 11/23/11 being selected as the effective date.

While we are hoping, for the sake of our private clients, that the Super Committee does not reduce the current $5M exemption amount, clients must be alerted to the possibility that the reduction could happen – and perhaps quite quickly. If the Super Committee opts to include the exemption reduction provision in the final proposal, and proposes an effective date equal to the date of the announcement, then clients will have until 11/22/11 to make any desired tax-exempt wealth transfers under the $5M exemption amount. Failure to do so may result in the loss of an extra $4M of a tax-free gift under current law; an amount which can be doubled for spouses.

In addition, the Super Committee is rumored to be revisiting the possibilities of eliminating short-term Grantor Retained Annuity Trusts (“GRATs”) as well as certain valuation discounts used to reduce asset values when gifted through a family entity, such as family limited partnership or family limited liability company. Since many wealth transfer techniques involve one or both of the foregoing, these should be considered as well as the upcoming deadline approaches.

Therefore, if you were hoping to take advantage of the temporary $5M gifting exemption while it is available, you may wish to expedite your transfer so that it takes place prior to the Super Committee announcement. This would avoid the possibility of losing the additional exemption amount if the worst case scenario comes to fruition.

If you have any questions about the foregoing, and how you may best plan for your circumstances, please feel free to contact us to assist you in planning in this uncertain environment.