Top Three Ways Outcome of Fiscal Cliff Negotiations Will Impact Estate Tax Rates and Exemptions

a. Rates for individual income tax jumps to 39.6% (with an additional 3.8% on investment income, effectively equivalent to =43.4%).

b. Dividends rates rise from 15% to the ordinary income rate.

e. The capital gains tax rate will increase to 20%.

* The death tax exemption, however, has support from both sides of the political aisle to remain at a higher amount.

“The emotional front-runner leading the charge to abolish the death tax is the example of the American Farmer,” explained McManus. “With large land holdings and expensive farm equipment, farmers often have large estates without much liquidity. In order, therefore, to pay estate taxes with rates as high as 55 percent, many American farmers must sell the family farm to raise the cash needed to pay the taxes.”

i. Reducing or eliminating valuation discounts for “family-controlled” entities by creating a category of “disregarded restrictions.”

ii. Requiring a minimum 10-year term for grantor retained annuity trusts (GRATs) and eliminating the ability to create a “zeroed out” GRAT.

iii. Limiting the duration of generation-skipping transfer tax to 90 years.

iv. Subjecting any trust that is treated as a grantor trust for income tax purposes to estate taxes in the grantor’s estate.

“Congress may use the final weeks of 2012 to sketch out a broad outline of higher tax revenue and reduced entitlement spending, kicking the can down the road, as it were, for next year’s Congress to fill in the blanks with the necessary legislative details,” said McManus. “Particularly with Congress needing to improve its low ‘job-approval-rating’ of 21 percent, the tremendous pressure to reach a compromise may serve as sufficient impetus for action.”

SOURCE McManus & Associates