FY2011 Green Book: Administration Plans on Estate Tax Return

Will the estate tax, like an old soldier, fade away? Or, like the same old soldier, will it return? The FY2011 Green Book, recently published by our friends in Washington, shows they are planning for the tax to return. The transfer tax sections of the FY2011 Green Book are looking awfully similar to what we saw last year. Perhaps the Administration was too busy working on health care to update the FY2010 Green Book for this year’s budget. A little-noticed special election changed the vector of health care reform just a little bit. This may free up some time in which the Administration and/or Congress will turn its energies to our little corner of the world, Subtitle B. If they do, here is what we can expect:

(It sounds so innocuous: “Modify Estate and Gift Tax Valuation Discounts and Other Reforms”….)

1. Require Consistent Valuation for Transfer and Income Tax Purposes.

This proposal would impose both a consistency and a reporting requirement. The basis of property received by reason of death under section 1014 must equal the value of that property for estate tax purposes. The basis of property received by gift during the life of the donor must equal the donor’s basis determined under section 1015. This proposal would require that the basis of the property in the hands of the recipient be no greater than the value of that property as determined for estate or gift tax purposes (subject to subsequent adjustments).

A reporting requirement would be imposed on the executor of the decedent’s estate and on the donor of a lifetime gift to provide the necessary information to both the recipient and the IRS. A grant of regulatory authority would be included to provide details about the implementation and administration of these requirements, including rules for situations in which no estate tax return is required to be filed or gifts are excluded from gift tax under section 2503, for situations in which the surviving joint tenant or other recipient may have better information than the executor, and for the timing of the required reporting in the event of adjustments to the reported value subsequent to the filing of an estate or gift tax return.

A footnote to the first proposal is interesting. “The Administration’s baseline assumes that the laws governing the estate, gift and generation-skipping taxes as in effect during 2009 are extended permanently. Consequently, the discussion of Current Law set forth above reflects the applicable law as in effect during 2009.” We’ll wait and see how this assumption plays out, won’t we?

The first proposal would be effective as of the date of enactment.

2. Modify Rules on Valuation Discounts

This proposal would create an additional category of restrictions (“disregarded restrictions”) that would be ignored in valuing an interest in a family-controlled entity transferred to a member of the family if, after the transfer, the restriction will lapse or may be removed by the transferor and/or the transfer’s family.

Specifically, the transferred interest would be valued by substituting for the disregarded restrictions certain assumptions to be specified in regulations.

Disregarded restrictions would include limitations on a holder’s right to liquidate that holder’s interest that are more restrictive than a standard to be identified in regulations. A disregarded restriction also would include any limitation on a transferee’s ability to be admitted as a full partner or to hold an equity interest in the entity. For purposes of determining whether a restriction may be removed by member(s) of the family after the transfer, certain interests (to be identified in regulations) held by charities or others who are not family members of the transferor would be deemed to be held by the family.

Regulatory authority would be granted, including the ability to create safe harbors to permit taxpayers to draft the governing documents of a family-controlled entity so as to avoid the application of section 2704 if certain standards are met. This proposal would make conforming clarifications with regard to the interaction of this proposal with the transfer tax marital and charitable deductions.

This proposal would apply to transfers after the date of enactment of property subject to restrictions created after October 8, 1990 (the effective date of section 2704).

Hoping to support Kentucky’s horse industry while we are waiting for slots legislation to pass, KYEstate$ is considering an over-under wagering pool on the page count (as measured in the Federal Register, of course) of the regulations required to implement this second proposal.(*) Bidding starts at 30 pages. Takers, anyone? An unspecified percentage of the handle will go to KEEP. [Make bids below in the comments section.]

3. Require a Minimum Term for Grantor Retained Annuity Trusts

In very civilized language, the Treasury explains that zeroed out two-year rolling GRATs have been costing it too much money. Accordingly, it proposes as follows:

This proposal would require, in effect, some downside risk in the use of this technique by imposing the requirement that a GRAT have a minimum term of ten years. The proposal would also include a requirement that the remainder interest have a value greater than zero and would prohibit any decrease in the annuity during the GRAT term. Although a minimum term would not prevent “zeroing-out” the gift tax value of the remainder interest, it would increase the risk of the grantor’s death during the GRAT term and the resulting loss of any anticipated transfer tax benefit.

This proposal would apply to trusts created after the date of enactment.

(*) Attention Kentucky regulators reading this post: this is a joke. KYEstate$ believes the wagering instinct is more wisely directed elsewhere.