Estate Planning Alert: Potential Changes from the Congressional Super Committee

 by Geoffrey Weg 

The Joint Select Committee on Deficit Reduction (the "Super Committee"), a 12 member bipartisan Congressional committee, is scheduled to announce its proposals on Wednesday, November 23rd for reducing the national deficit by at least $1.5 trillion over the next 10 years. While the Super Committee's proposals are technically secret until November 23^rd, rumors have begun to circulate among tax and financial advisors about possible changes to the current estate, gift and generation-skipping transfer tax laws, including a proposed early reduction of the $5 million estate, gift, and generation-skipping transfer tax exemption.  The exemption is currently set at $5 million through December 31, 2012, after which it will revert to $1 million barring further congressional action. Other rumored changes include a return to higher estate, gift, and generation-skipping transfer tax rates, imposing minimum terms on grantor-retained annuity trusts, and limiting or eliminating valuation discounts for minority interests in entities. It is possible that the Super Committee may recommend these changes to become effective as early as November 23, 2011.

Although rumors of an immediate reduction in the Federal gift tax exemption are unsubstantiated and information on specific proposals of the Super Committee is not yet available, the possibility of such a reduction has been widely discussed by practitioners around the country. Therefore, we wanted to share this information with you in the event you or your clients are considering utilizing your $5 million Federal gift tax exemption. If you or your clients are considering making any gifts in 2011, it may be advisable to complete these gifts prior to November 23rd, if possible. Additionally, you may want to consider accelerating gifts that you otherwise planned to make in 2012 to avoid any potential impact from any Super Committee proposals.

Until Congress enacts a long-term extension or reformation of the current estate and gift tax system, the rumors and speculation will persist. Rather than add to the speculation about what might happen, we note the following points and opportunities that indicate now is a good time to take advantage of the current $5 million gift tax exemption:

•  Even without any legislative action, under current law the current $5 million exemption and 35% rate will revert at the end of 2012 to a $1 million exemption and a 55% rate.
•  In recent years, the Treasury Department has consistently recommended changes to substantially reduce the effectiveness of certain widely used planning techniques, including a significant reduction in the availability of valuation discounts applicable to transfers of limited partnership interests and other minority interests in family controlled entities, and an increase in the minimum term of grantor retained annuity trusts ("GRATs') from two to ten years.
• The benchmark interest rates that are required to be used in many estate planning transactions are at historically low levels. For example, the November rate used for GRATs is 1.4%, while the November rate for annual interest paid on a short term private loans is 0.19%.
• The current volatility in the financial markets may create favorable valuations of interests in closely-held entities for transfer tax purposes.

Many observers consider a sudden adverse change in legislation unlikely.  However it would be wise to remember that the legislation implementing the current favorable structure was enacted suddenly last December without any significant public discussion, and was not anticipated by many observers.  With the current emphasis on deficit reduction, it is plausible that Congress could very quickly enact legislation that would have substantial adverse impacts on the estate and gift taxes applicable to standard wealth-transfer techniques.