The Republican and Democratic leaders in Congress have selected the "Super Committee" members to represent their parties and our nation in formulating deficit reduction recommendations. These twelve members are tasked with saving $1.2 trillion to $1.5 trillion. If they fail to do so by Thanksgiving, automatic spending cuts go into effect.
What does this have to do with estate planning? Last week Democratic Super Committee members released a Summary of their proposals, and a couple of them address estate planning strategies. Included among the recommendations were eliminating valuation discounts for family transfers. These discounts, which can reduce the value of assets anywhere between 30% to 50% for estate and gift tax purposes, have been the bane of the IRS for years. A second proposal would eliminate two year rolling GRATs and impose a minimum ten year GRAT period. Both these proposals have been considered for the last couple of years and are now becoming closer to reality. The increased likelihood of two advantageous tax planning strategies being eliminated in 2012 should lead affluent taxpayers to act this year.
What is uncertain is whether further changes in the law could negatively affect planning strategies. One ominous note: the Democratic Super Committee members’ Summary states that "revenue could be raised against a current-law baseline by reverting to 2009 levels one year early (in 2012)." This sentence pertains to current law, which provides for a $5 million exemption amount both for death and gift purposes. In 2013, this exemption amount is scheduled to fall to $1 million. Is it possible Congress could adopt a $3.5 million exemption amount, or even a $1 million exemption amount, in 2012 for transfer purposes?
Although we do not know what revenue raising provisions will become law, we do know that, presumably for the next four months, taxpayers have the opportunity to use two year GRATs, discounting, and most importantly, a $5 million exemption for gift purposes. For those affluent taxpayers fortunate enough to benefit from these exemption amounts, it is folly not to take advantage of today’s law.