Proposed tax changes to affect estate plans

[Editor’s Note: This is the final installment of a three-part series by members of CBIZ Tofias and Mayer Hoffman McCann P.C. on potential changes in tax law.]

As it did with business and individual taxes, the Obama White House is proposing numerous and significant changes that could affect your retirement planning, and estate and gift taxes. Here is some of the current thinking which may be of interest to you.

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Retirement Planning
&#8226 Automatic enrollment in IRAs. Employers without a retirement plan would be required to offer automatic enrollment in an individual retirement account (IRA) to all employees on a payroll-deduction basis. Employees would be enrolled at a default rate of 3 percent. However, small employers (employers with fewer than 10 employees) would be exempt but would be encouraged to participate. The proposal would be effective for tax years beginning after Dec. 31, 2011.
The administration expects that payroll deductions will be directly deposited into IRA accounts. Additionally, the administration anticipates prescribing a low-cost, standard type of default investment and a limited number of low-cost investment alternatives.
This proposal is one of the administration’s first salvos in reforming retirement savings options. Treasury officials have indicated that the administration is examining ways to strengthen 401(k)s and other defined-contribution plans.
&#8226 Saver’s credit. Lower- and middle-income individuals may currently be eligible to claim a nonrefundable credit for contributions to elective deferral plans or IRAs (the saver’s credit). The maximum credit is $1,000. The administration proposes to make the saver’s credit fully refundable. Additionally, 50 percent of the credit (up to $500) would be matched. These refundable credits would be automatically deposited to the taxpayer’s qualified retirement savings account. The amount of savings that would be matched would phase out at a rate of 5 percent of adjusted gross income (AGI) in excess of $32,500 for individuals and $65,000 for married couples filing jointly. Estate and
gift tax
&#8226 Extend 2009 estate and gift tax levels. The administration’s proposals assume as a baseline the continuation of estate and generation-skipping transfer taxes at their present 2009 levels. Under current law they are scheduled to be entirely repealed in 2010 and then revert to higher pre-2001 rates and lower exemptions starting in 2011. The $3.5 million estate tax exclusion and maximum 45 percent rate would continue into 2010.
Extending the estate tax at its present level for 2010 will raise revenue over and above having no estate tax as scheduled. Extending it beyond 2010 at its present level, however, would cost revenue over and above pre-2001 levels. As a result, many observers predict passage this year of only a one-year extension into 2010, with that revenue used to offset an extenders package.
&#8226 Estate and gift valuations. Among one of the larger of the administration’s proposed domestic revenue raisers is the requirement to consistently value estates and gifts. The basis of inherited property that a taxpayer receives by reason of a decedent’s death under Code Sec. 1014 must be equal to the value of that property for estate tax purposes.
&#8226 Basis. Additionally, the basis of property received as a gift during the life of the donor must also equal the donor’s basis. In effect, these proposals require that the basis of property in the hands of the recipient are no greater than the value of the property as determined for purposes of the estate or gift tax.
In order to restrict techniques used by taxpayers to discount the value of inherited property, the administration proposes to create a new category of restrictions called “disregarded restrictions” under Code Sec. 2704(b). This new provision would affect estates and trusts. Extenders
Every year, Congress debates whether to extend a package of temporary but popular tax incentives. The administration has signaled its support to extend these temporary incentives through Dec. 31, 2010.
Most congressional leaders consider an extension of some of the expiring provisions, together with the expiring alternative minimum tax patch and estate tax, essential tax legislation that must be passed by year-end 2009.
The administration has specifically identified the following for extension through Dec. 31, 2010:
&#8226 Subpart F active financing (income derived from the active conduct of banking, finance, insurance or similar business is temporarily excluded from subpart F income).
&#8226 Tax treatment of certain payments to controlling exempt organizations (excludes these payments from unrelated business income).
&#8226 New Markets Tax Credit (allows a credit for making qualified equity investments in designated Community Development Entities).
&#8226 Qualified leasehold improvements (improvements eligible for a 15-year Modified Adjusted Cost Recovery System recovery period).
&#8226 Empowerment and community renewal zones (eligible for special tax incentives, such as tax-exempt financing initiatives).
&#8226 Credits for biodiesel and renewable diesel fuels (includes a variety of tax incentives to encourage the production of biodiesel and renewable diesel fuels). &#8226

Richard A. Plotkin (rplotkin@cbiztofias.com) is a director at CBIZ Tofias, which operates in association with Mayer Hoffman McCann P.C. Local offices are located in New Bedford, Newport and Providence.