Legal News

In Lieu of a Tax Refund, a Chevy Nova

By Brian Harris

OK, that's not part of the president's tax proposals, at least not yet.

The Obama administration has released some of its tax proposals and, under the rubric of closing "sort of" loopholes, there is a suggestion that grantor retained annuity trusts, or GRATs, must have a minimum length of 10 years. GRATs of two years' duration had become popular, as a technique that improves on the benefits of long-term GRATs, and commentators had suggested that even greater benefits could be obtained with very short-term GRATs. GRATs are a useful technique for transferring wealth, but some in Washington apparently thought the technique was being pushed beyond its intended level of tax benefit. Similarly, a proposal has been made to limit the kinds of discounts that may be obtained in transfers to family-limited partnerships, or FLPs. FLPs are also a popular transfer technique, and an important part of the value proposition is the reduction in value that results from restrictive provisions in the partnership agreements. Again, it is apparently someone's view that discounts based on provisions of the partnership agreements are not always supported by reality.

These views, of course, were not formulated since Jan. 20. They have been percolating in Washington for years and represent the tension between those who want to push the envelope of tax planning techniques and those who view most tax planning as somehow unfair or undemocratic. When these proposals are taken up in earnest later in the year, there might be additional restrictions placed on planning techniques. In fact, that's just about certain to happen. For now, the proposals being made are stated to become effective on enactment. It is possible for changes to be made retroactive to the beginning of the legislative session but, for now, that's not the stated intent. For that reason, there is now a flurry of planning taking place.

One item that Congress still hasn't taken care of is the federal estate tax or, in PR-speak, the death tax. Under the current law, the exemption from tax is $3.5 million and the tax rate is 45 percent. In 2010, the tax disappears, but for one year only, then comes back in 2011 with a graduated rate up to 55 percent and an exemption reduced to $1 million. The administration has proposed continuing the 45 percent rate and the $3.5 million exemption indefinitely, but attention seems about to turn to the health care reform bill, with the hope that a bill will be passed by Oct. 1. Will this effort, on top of the variety of other issues now before Congress, including one or two wars, a Supreme Court nomination and the financial crisis, give adequate time to amend the estate tax law by the end of the year? As noted above, Congress could make the change next year and have it retroactive to Jan. 1, 2010, but that would only add more uncertainty to what is becoming an uncertain federal tax system.

The next six months are likely to see significant changes in how our clients and we are taxed, as well as how we receive and pay for health care. It's not too early to think about a moon roof with that tax refund.

Robert H. Louis
Saul Ewing
http://saul.com

Full post as published by The Legal Intelligencer Blog on June 10, 2009 (boomark / email).