The President’s overdue budget proposal for fiscal 2014 was recently released. No one was surprised that it included a wide array of proposals for getting more tax revenue from “the rich.” However, some of the details were unexpected. Overall, it reinforced the idea that nothing in Washington is “permanent,” least of all tax legislation.

The President wants to roll the estate and gift tax back to 2009 levels. Specifically, the budget calls for a $3.5 million federal estate tax exemption, a $1 million federal gift tax exemption, and a 45% tax rate. His proposal eliminates indexing of these amounts for inflation. One item that remained from the 2010 transfer tax compromise is the portability of estate and gift tax exemptions between spouses.

The President has advocated this approach throughout his administration, so he gets high marks for consistency. Many observers thought that the issue of the proper estate tax exemption was disposed of permanently last January, with the American Taxpayer Relief Act of 2012. The reason for the return to the 2009 paradigm, provided by the Treasury’s “Green Book” explanation of the budget [] is simply: “We need an estate tax law that is fair and raises an appropriate amount of revenue.” No reason was given for dropping the inflation indexing.

Families with medium levels of wealth ($3.5 million to $5.25 million), who would be hit hardest by the proposed change, are given plenty of warning, because the budget defers the exemption rollback until 2018, two years into the term of the next President. The budget proposal also makes clear that there would be no “clawback” of transfer tax benefits for those who take advantage of the higher gift tax exemption before 2018.

Legislative Pushback
One would expect little in the way of support for increased estate taxes in the Republican-led House, but there also is surprisingly little support for it in the Senate, despite control by the Democrats. In March an amendment was proposed to the Senate budget resolution calling for the complete elimination of the federal estate tax, provided revenue could be found to offset the projected reduction in tax receipts. The amendment was adopted by a vote of 80 to 19!

Admittedly, the amendment is nonbinding, and the budget resolution is not going anywhere. But one blogger reacted to the Senate action with a post headlined “Senate Democrats Abandon the Estate Tax.”

More Estate Tax Proposals
Several other estate tax changes included in the President’s budget proposal could be added to a tax reform bill later this year. These include:

• requiring consistency in valuation of assets for transfer tax and income tax purposes;
• mandating a minimum 10-year term for a grantor retained annuity trust (GRAT), and a maximum term of the grantor’s life expectancy plus 10 years;
• limiting to 90 years the duration of the exclusion from the generation-skipping transfer tax (no revenue effect during the budget forecast period);
• changing the rules governing grantor trusts so that most such trusts would be included in the grantor’s estate;
• expanding the lien for IRC §6166 estate tax deferrals; and
• applying the generation-skipping tax to payments of education or medical expenses if the payments come from a generation-skipping trust.

These proposals would become effective on the date of enactment, so earlier trusts would be protected under a “grandfathering” rule. The prospects for these ideas is unknown, but prudence suggests that those who are interested in tax-saving strategies that could be adversely affected by new legislation should not procrastinate.

A New Cap on Retirement Plan Accumulations?
Another surprise in the President’s budget proposal is a limitation on the accrual of funds in tax-qualified retirement plans. “Such accumulations can be considerably in excess of amounts needed to fund reasonable levels of consumption in retirement,” the Green Book reports. The cap would be tied to the amount needed to fund a maximum joint-and-survivor annuity, currently about $205,000 at age 62. The cap is estimated to be $3.4 million today. Once the cap is reached, additional contributions and accumulations would be barred. However, the account could continue to grow through strong investment performance, perhaps far above the cap levels, without tax penalties.

During the last Presidential campaign, Mitt Romney revealed that he had an IRA worth between $20.7 million and $101.6 million. How could that be? Bain Capital let its employees invest their retirement money in its takeover deals during Romney’s tenure there, and some of these deals were very lucrative. The Wall Street Journal reported at the time that some Bain employees enjoyed a 583-fold return in just 20 months. It would seem that the proposed cap on accumulations in qualified retirement plans is aimed at these sorts of situations.

But how many of these are there, really? There is much coverage in the popular press of the savings shortfalls of baby-boomers and the widespread lack of financial preparation for retirement. How many Americans already have $3.4 million IRAs? The Green Book does not say, but it does project that the cap, simply by limiting additional contributions, would raise a whopping $800 million in the first year of enactment. If the tax rate is 40%, that means a $2 billion reduction in the amount contributed to or accrued in qualified retirement plans in that year.

– Heinz J. Brisske