Alabama Residents Prepare for Possible Estate-Planning Changes: Part I

If President Obama is successful in passing his proposed budget, beginning next year it will become much harder for Alabama estate planning attorneys to help individuals pass along money to their children and grandchildren without the government tacking a heftier fee. According to a recent article on, the President’s recently proposed budget for 2013 would permanently restore the estate tax rates to those that were in effect in 2009 and limit several popular methods for shifting assets to future generations. Click here for a copy of Obama’s budge proposal.

Currently, individuals are allowed to transfer up to $5.12 million tax-free during life or at death without incurring a tax of up to 35%. This is referred to as the basic exclusion amount. Furthermore, widows and widowers are permitted to add any unused exclusion of the spouse who died most recently to their own. This enables couples to collectively transfer up to $10.24 million tax-free.

The President has proposed decreasing this number, suggesting that the basic exclusion amount be capped at $3.5 million. The tax-free amount for lifetime gifts would also decline to $1 million and the top tax rate would rise to 45% for transfers during life or death that exceed the limits.

The President’s proposed budget also takes aim at several estate planning strategies that are designed to increase the lifetime exemption amount and minimize any gift taxes. The following is a quick rundown of what’s being considered.

• Grantor trusts

The term refers to the fact that the person who creates the trust, known as the grantor, is able to retain certain rights to the contents of the trust. The trust is thus not treated as a separate entity and it is the grantor who must pay tax on any earnings of the trust.

It was determined that paying tax on trust earnings is not considered a gift to trust beneficiaries. The tax serves the purpose of shrinking the grantors total estate while allowing the assets inside the trust to appreciate without being depleted by income taxes.

Another good feature of this trust is that assets placed in the trust are removed from the grantor’s estate. This means that from a tax perspective the transfer is seen as a completed gift. The value of the assets are frozen at the moment of transfer so that any future appreciation is not subject to estate tax or further gift tax.

Obama’s proposal would get rid of this feature of these trusts. His plan would eliminate an important tax-saving tool used by many families. The President wants these trusts to be taxable as part of the grantor’s estate and would like distributions from the trust to beneficiaries during the grantor’s life to be subject to gift tax.

• Dynasty trusts

A handful of states allow trusts to continue in perpetuity and pass wealth through multiple generations without incurring estate or gift taxes. These trusts are allowed to continue only in states that have abolished the rule against perpetuities. Such states include Alaska, Delaware, South Dakota and Wisconsin but residents of other states can choose to locate their trusts in the states, provided that some connection to the state exists and certain other conditions apply. The President’s proposal would do away with dynasty trusts, limiting the generation-skipping transfer tax exemption to 90 years.

There are several more proposed changes contained in the President’s budget and we’ll discuss them in more detail in our next post. In the meantime, if you need help managing your financial affairs, turn to the trusted  Huntsville estate planning attorneysat Martinson & Beason, P.C. who will help you craft a sound plan to secure your family’s future.

Source: “Obama Declares War On Rich Folks And Wealth Advisors,” by Deborah Jacobs, published at