President Obama recently released the Administration’s FY2014 budget proposal, including the Treasury’s “Green Book.” There were some interesting inclusions.

Many estate-planning attorneys breathed a sigh of relief in January, when ATRA was passed with a $5.25 million applicable exclusion. More importantly, they were relieved by the certainty of the removal of the “sunset” provision in the prior law. We finally had a “permanent” estate tax. We now learn just how “permanent” it may be. Only a few months after ATRA’s passage, the President has issued his proposal to modify the estate tax once again.

The budget would reduce the exclusion to $3.5 million, the 2009 level. Perhaps more importantly, it would remove the inflation-escalation provision and limit other strategies. This is basically the same as last year’s proposal, before ATRA was passed.

In addition, the proposal would limit tax-favored retirement accounts to a maximum of $3 million. This is concerning because it appears that these accounts are increasingly viewed as a potential source for increased revenue. Last year, the Senate Finance Committee had a bill that included a provision that essentially would have imposed the 5-year distribution rule on all accounts at death, other than ones going to the surviving spouse. While the Committee did not include it in the final mark up, it shows that increased revenue from retirement accounts is on the radar.

Does suggested planning change in light of this budget? It might accelerate it. If you have a client with over $3.5 million in assets, you may consider having them plan more aggressively to keep the value in their taxable estate down. As a reduction in the value of the taxable estate can take years with a methodical plan, it may be best to start sooner rather than late.

As for the proposed change to retirement money, one strategy would be to convert assets to Roth plans. That would make the value in the plans worth more, as they would be after-tax dollars.

Of course, the President’s proposal is just that, a proposal. Even though it comes from the President, passage is far from assured. We will have to wait to see what tax legislation comes out of the House and Senate.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com