Treasury Greenbook: Technical Guide to the Administration's Proposed Budget
Print Article | MasterMind
On May 11, 2009, the U.S. Treasury Department released the General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals (Greenbook) to “provide details of plans to cut taxes for small businesses and middle class families and close unfair corporate tax loopholes.” The Greenbook plans to target “valuation games played by those facing estate and gift taxes that allow them to undervalue transferred property.” The following highlights a portion of the items possibly effecting charitable gifting and estate planning:
Transfer-for-Value Rule. The Administration is also proposing changes to the transfer-for-value rule and its exceptions. There is some talk that individuals are using the exceptions to the transfer-for-value rule in order to avoid the taxation that would otherwise be imposed by the transfer-for-value rule. To correct this, the Administration proposes changing the safe harbor exceptions to the transfer-for-value rule to ensure that none of the safe harbors apply to “buyers of policies.” When the policy benefits are paid out, the insurer would be required to report, both to the IRS and to the payee, the gross policy benefit, the buyer’s TIN, and the insurer’s estimate of the buyer’s basis. If this proposal were enacted it would apply to sales of interests in life insurance policies and payments of death benefits for taxable years beginning after December 31, 2010.
Valuation Discounts. The Administration is also looking to enforce the valuation rules of Section 2704. Under §2704(b), “applicable restrictions” on interests in family controlled entities are disregarded for valuation purposes. The Administration is concerned that restrictions which should be disregarded for valuation purposes are being recharacterized so that they fall outside the scope of §2704(b), thereby allowing the taxpayer to avoid the application of §2704(b). In order to prevent this abuse, the Administration proposes a new category of “disregarded restrictions,” which would not be taken into account when determining the value of the interest in a family controlled entity. Restrictions would be disregarded if, after the transfer the restriction will lapse or may be removed by the transferor or the transferor’s family. Disregarded restrictions would also include: (i) limitations on a holder’s right to liquidate that holder’s interest that are more restrictive than a standard identified in the regulations; and (ii) any limitation on a transferee’s ability to be admitted as a full partner or holder of an interest in the entity. Under the proposal, an “attribution” rule would deem certain interests held by charities or other non-family members as being held by family members for purposes of determining whether a restriction may be removed by members of the transferor’s family. If it were enacted, this proposal would apply to transfers after the date of enactment to property subject to restrictions created after October 8, 1990 (the date §2704 became effective).
Grantor Retained Annuity Trusts (GRATs). The Administration has also turned its attention to grantor retained annuity trusts (GRATs) which traditionally come with a fair amount of risk to the taxpayer/grantor because if the grantor does not outlive the GRAT term, the value of the assets is included in the grantor’s taxable estate. In order to minimize this risk but still take advantage of the wealth-shifting aspects of a GRAT, planners and their clients began adopting short term (2-year) GRATs. The Administration sees this as an abuse of the tax provisions creating and controlling GRATs and as a result has proposed a limit to the term available for GRATs. Under the Administration’s proposal, all GRATs would have to have a minimum term of 10 years. If enacted, the proposal would apply to all GRATs created after the date of enactment.
Reporting Purchases of Life Insurance. The Obama Administration has added provisions to the proposed FY 2010 Budget that address several perceived abuses taxpayers are employing in order to avoid taxation. Those proposed changes to the tax code include a change to the tax-free nature of life insurance death benefits. The administration has proposed a requirement that a person or entity who purchases an interest in an existing life insurance contract with a death benefit in excess of 1,000,000 must report: (i) the purchase price; (ii) the buyer’s taxpayer identification number (TIN); (iii) the seller’s TIN and the issuer; and (iv) the policy number. The purchaser would have an obligation to report this information to the IRS, the insurer, and the seller. If this proposal were to be enacted it would apply to sales of interests in life insurance policies and payments of death benefits for taxable years beginning after December 31, 2010.
For Advisor Use Only. This information is for informational purposes only. Although this topic may involve tax, legal, or accounting or other issues Newport Financial Group, Inc. are in the business of offering such advice. The above material was not intended or written to be used for purposes of avoiding any penalty that may be imposed by the Internal Revenue Service. Individuals interested in these topics should consult with their own professional advisors to examine legal, tax, accounting or financial planning aspects of these topics. It is not a promotion of any strategy discussed herein.
[Back to Top] |
