Anyone can tell you what the current state of the law is when it comes to the federal estate and gift tax rules (news flash: for the first time in over a decade they’re permanent, click here). For those of us in the trenches, the more interesting question is "what’s next?" 

If I had to bet on what the next "big thing" in the estate-tax world is going to be, I’d go with one of the five "structural reforms" proposed by the President in his 2013 budget (and explained/scored in this recently published Congressional Research Service report). None of the ideas covered in the CRS Report is new, which means they’ve all demonstrated staying power (usually a good predictor of future enactment). And all of the proposed fixes have the added political bonus of increasing tax revenues without raising tax rates or lowering the exemption amount.

Want to know the future? Read on . . . 

CRS Report:

[T]he current size of the exemption and the rate of tax have been set in permanent tax law, and there is not much indication of a reconsideration. There are, however, some more narrow proposals aimed at abuse that have been included in some other legislation and in the President’s budget proposals. These provisions are described below. All of the estimates of revenue gain are for FY2013-FY2022 and are obtained from the FY2013 budget proposals. Most of the provisions were also estimated by the Joint Committee on Taxation and this source is used in the discussion below except in one case. Note that estimated budget effects would be altered and presumably reduced by the recent estate tax legislation.

[1] Grantor Retained Annuity Trusts

A Grantor Retained Annuity Trust (GRAT) is a trust that allows the grantor to receive an annuity, with any remaining assets transferred to the trust recipient. The value of the gift is reduced by the value of the assets used to fund the annuity. If the assets in the trust appreciate substantially, then virtually all of the gift can be reduced by the value of the annuity, while still providing a substantial ultimate gift to the recipient. If the grantor dies during the annuity period, the remaining value of the annuity is included in the estate. This trust approach could be a method of transferring assets roughly tax free if the assets appreciate at a rate faster than the discount rate used to value the annuity. The grantor needs to survive over the period of the annuity. To assure the latter will be likely to occur, many of these trusts have very short annuity periods, as short as two years. The GRAT proposal contained in H.R. 4849 in the 111th Congress and in the President’s budget proposals would impose a minimum annuity term of 10 years, disallow any decline in the annuity, and require a non-zero remainder interest. The provision was estimated to raise $3.6 billion over 10 years.

[2] Minority Discounts

There are existing restrictions to keep estates from engaging in artificial actions designed to reduce the value of estates (such as freezes on assets). As discussed above, courts sometimes allow estates to reduce the fair-market value when assets are left in family partnerships in which no one has a majority control. These discounts have even been allowed when assets are in cash and readily marketable securities, and the setting up of these family partnerships has become an estate tax avoidance tool. A provision in the Administration’s proposal would disallow these discounts. The JCT did not estimate this provision because of the lack of specific detail, but the Administration’s estimate was $18.1 billion over 10 years.

[3] Consistent Valuation

Currently, there is no explicit rule preventing a low valuation of fair-market value for an estate and a high valuation of the asset for purposes of stepped up basis in the hands of the heir. A low value of an asset reduces the estate tax, but a high value (because it reduces the amount of gain) reduces the capital gains tax. Requiring the same value for both purposes was projected to raise $3 billion over 10 years.

[4] Limit the Duration of Generation-Skipping Trusts

When generation-skipping transfers are made to a trust, the estate tax exemption applicable to them also exempts the associated earnings during the trust lifetime. In the past, a trust life has been limited because most states had a Rule Against Perpetuities that generally limited trusts to a 21-year life. Most of these laws have been eliminated. This Administration proposal would limit the life of a GST trust to 90 years. The revenue effect would be negligible over the next 10 years.

[5] Coordinate Grantor Trusts Income and Transfer Tax Rules

In a grantor trust, an individual is treated as owner for income tax purposes. However, the trust and the individual are treated as separate persons for purposes of the estate and gift tax. This proposal from the Administration would include the assets of the trust in the grantors estate and subject distributions to the gift tax if the grantor is the owner for income tax purposes. If the grantor ceases to be the owner, the assets would be subject to a gift tax. This proposal was projected to raise $3.3 billion over 10 years.