No Such Thing as Forever: President Obama’s 2014 Budget Proposes to Reduce Estate Tax Exemption Amount in 2018

Just when many of us believed that, after years of changes and uncertainty, the federal estate tax exemption had stabilized at $5.0 million, subject to inflation adjustment (for 2013, it is a $5.25 million exemption), we have been put on notice that the President already favors changing it again soon.

On January 1, 2013, Congress passed the American Taxpayer Relief Act, which enacted a “permanent” $5.0 million per person federal estate tax exemption equivalency amount (adjusting for inflation for years after 2011) and a top estate tax rate of 40%.  President Obama signed this legislation into law on January 2, 2013.

Just four months later, however, the President released his proposed budget for fiscal year 2014, in which he advocates a return to the 2009 levels of a $3.5 million per person federal estate tax exemption equivalency amount, but which is not inflation-adjusted, and a 45% top estate tax rate, beginning in 2018.  This proposal is part of a wider effort in the proposed budget to prevent the wealthy from accumulating large amounts of wealth in tax favored vehicles, which could then be passed to heirs.  The proposed budget would also cap retirement accounts at $3.4 million of assets (enough to finance an annuity of $205,000 a year) and require those who inherit a rollover IRA to withdraw assets within five years.

Members of Congress on both sides of the aisle have expressed dissatisfaction with this proposed budget, so this proposal is far from a “done deal.”

The larger lesson is that the estate tax rate and estate tax exemption equivalency amount are still subjects of ongoing negotiation, and even traditionally stable wealth accumulation vehicles such as 401Ks and IRAs are now arenas of dynamic discussion.  Those of us engaged in wealth transfer planning have become accustomed to this type of change and uncertainty.

If you have any questions, please contact Janice Tam at jtam@carr-mcclellan.com or at (650) 342-9600.