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Are these tax proposals fair?

By Jennie L. Phipps ·
Monday, December 17, 2012
Posted: 6 pm ET

The President Barack Obama administration has taken aim at five estate and retirement planning strategies, says John McManus, founding attorney with McManus & Associates in New York City and New Providence, N.J.

Some of the people who are using these strategies as they approach retirement have lots of money to manage. But those using these approaches also include small-business owners and farmers eager to pass their enterprises on to their children without burdening them with a huge tax bill, McManus says.

Here are simplified summaries of what the government proposes to do to collect more taxes from money passed down via estates and the like. You decide whether the proposals are fair.

Lower the estate tax exemption. The proposal on the table would limit the estate tax exemption to $3.5 million. Anything above that would be taxed at a rate of 45 percent. Currently, estates are exempted from taxes up to $5 million, and anything higher is taxed at 35 percent.

Retool intentionally defective grantor trusts. Today, a family can put a business or other property in a trust and give their offspring pieces of the trust. The offspring have no control over the trust and no right to sell what's in it. The value of the gifts are discounted for tax purposes because the gifts are "defective" since the recipients don't have a say in their management. Under the government's proposal, the tax discount would be reduced or disappear.

Tax grantor retained annuity trusts, or GRAT. Families use a GRAT to avoid the cap on gift taxes. Mom and Dad put money in a trust and lend it to their children. The kids keep whatever the trust earns in excess of the interest on the loan, which they pay back to Mom and Dad. Because interest is paid, the IRS sees this transaction as a loan and not a gift. The Obama administration wants to put new limits on GRATs.

Limiting generation-skipping transfer tax exemptions to 90 years. The children have done so well that they don't need Pop's money, so it is put in trust for the grandchildren, who under certain circumstances can receive it tax-free after their own parents die. Proposed changes would limit the tax-free time period to 90 years, which doesn't seem all that long considering current lifespans.

Taxing grantor trusts when Dad still manages the money. Under the proposal, if Dad has continued to buy and sell the investments held in certain trusts, the money would be considered a part of his estate and subject to taxes when he dies.

McManus says he believes that taxing estates at 45 percent is unfair and counterproductive. "We are proposing to penalize hardworking people who aren't making millions. Having to pay a punitive amount in taxes takes away the motivation to start up a business."

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Paul Osborne
December 21, 2012 at 8:10 pm

Regarding Matt's comment about the $3.5 million exemption, the $3.5 million threshold is not based on income, but on the valuation of the assets in the estate. Under the scenario of a 45% tax rate on any estate over $3.5 million, that translates into an estate tax of $675,000 for a business with a valuation of $5 million.

Paul Fites
December 21, 2012 at 7:56 pm

I agree it is the massive spending that has got to stop. We simply cannot spend more than we earn, so the gov't should also budget (which they haven't done in over 3 years) appropriately.The USA is one of the highest taxed countries in the world. The Social Security Trust should have been hands off, but the gov't (beginning with the LBJ administration I believe)raided those funds and left them with IOU's. Absolutely despicable!

December 19, 2012 at 1:22 pm

Seems as though everyone is missing the boat. It's the spending that is out of whack. The money is there. And still the govt. wants more money from us in taxes. How about less spending on other countries and use that here. After all it's our money.

December 19, 2012 at 12:28 pm

I agree with William Barnett's comments on this thread.

leonard wachs
December 19, 2012 at 10:33 am

Dear greedy Matt,

The tax and tax some more system,and greedy "something for nothing"people like you seem to think you deserve the fruits of my 40 years of labor more than my children and grand children do.

I signed the notes,mortgages, and obligations to grow my business
over 40 years of my life, and assumed all the risk. Not you,and millions like you,or the government would have given me all my money back had I failed. And I paid taxes on every penny I made.

I lived a conservative life,and am debt free. Why do you think you have the right to take what earned for my family.

Your arrogance is infuriating.

December 19, 2012 at 8:59 am

"McManus says he believes that taxing estates at 45 percent is unfair and counterproductive. "We are proposing to penalize hardworking people who aren't making millions."

But... aren't they making more than $3.5m?

"The proposal on the table would limit the estate tax exemption to $3.5 million. Anything above that would be taxed at a rate of 45 percent."

Or is that $3.5m before costs and whatnot?

Also, other than the first one, these all kind of seem like ways to game the system and get out of taxes, do they not? Perhaps not the generation-skipping one either. If my grandfather made money, and it's assumed that was taxed, shouldn't he be able to give it to me without incurring more taxes? I may not be quite understanding that one, though.

As far as taxes discouraging business... even in the extreme, isn't 55% of all the money you can make better than 100% of the money you never made not starting a business? I suppose it depends on costs - if that 55% becomes 25% or 15% by the time it gets to your pocket, you may be better off not bothering.

December 19, 2012 at 8:55 am

To invrest your money in the stock markets is like putting it in the govsrment's hands pretty soon it gone and nobody seems not know where it went? put it a IRA account that way you will have control over it not the greedy fiananciers on Wall Street because they dont care.

William Barnett
December 19, 2012 at 12:54 am

Yes it is possible for the changes to be fair if the following is adheared to.Split the accounts into Part A and Part B.
Part A: All monies in the account prior to the change should be administered as originally set up and no new monies added to it; or changes allowed as of the date of 'Changes In The Law'.
Part B: All new monies added as of the date change to be administered under the new laws and new accounts to be administered in accordance with the proposed changes.

PBS Frontline
December 18, 2012 at 4:34 pm

Dear Ms. Phipps,
I read a piece you wrote not long ago for AOL's Daily Finance. We are currently in production on a documentary about retirement and two of the individuals you mentioned in your piece were of great interest to us. Might you send us your contact information so that we may further inquire?
Thank you,
PBS Frontline