On August 2, 2011, President Obama, without public ceremony, signed the Budget Control Act of 2011. The Act contains several parts, including a combined increase in the debt limit that will total at least $2.1 trillion, and spending cuts of approximately $1 trillion over a 10-year period (which do not affect Social Security, Medicare or Medicaid).

The Act itself does not contain any tax law changes. Instead, the Act requires that Congress assemble a joint committee (composed of six Senators and six House Representatives) to make concrete recommendations for reducing the Federal deficit by $1.5 trillion over ten years. The joint committee has been charged with proposing legislation by November 23, 2011. Then, Congress will have to vote on the joint committee report (under a fast-track, procedurally-protected process) by December 23, 2011. Thus, the specific form that deficit reduction will take is unknown.

The Act also contains "enforcement triggers" should the committee fail to recommend a plan, or should Congress defeat the plan recommended by the committee. These enforcement triggers include (1) automatic across-the-board spending cuts that would take effect in 2013; or (2) a process for considering/enacting a Constitutional amendment requiring a balanced budget; and/or (3) the potential for expiration of the "Bush Tax Cuts".

While no one can really predict what Congress will do, among the possibilities is that it will let the gift and estate tax exemption decrease from $5 million to $1 million; and let the top rate increase from 35% to 55% on January 1, 2013, as is presently scheduled. Or, perhaps the Republicans will agree to a higher income tax rate to eliminate the hated AMT and estate tax. And, if the estate tax exemption is eliminated, what will happen to the gift tax exemption? The gift tax exemption provides the "backstop" for the income tax (by minimizing gifts to donees in lower income tax brackets). Thus, Congress could reduce the gift tax exemption to its prior level of $1 million if the estate tax is repealed.

Other possibilities which have been considered or recommended by the President in the past (but did not find their way into the Tax Relief Act of 2010) include new rules to eliminate or restrict valuation discounts for FLPs and FLLCs; requiring a minimum 10-year term for GRATs, (which substantially increases the mortality risk); and limiting estate tax-free dynasty trusts to 90 years.

While many clients planned on having until the end of 2012 to make their estate planning decisions, the new deadline may be November 23, 2011 (because it's possible that the effective date of any new tax laws could be the date of the proposal instead of the later date of enactment). Therefore, clients who may benefit from the $5 million gift/estate tax exemption, valuation discounts, zeroed-out GRATs, and dynasty trusts should consider acting sooner than later.

For more information regarding this topic, please e-mail your requests to Julius Giarmarco, or call Julius at (248) 457-7200.

In our Summer 2011 newsletter, we discussed in detail the use of defined value clauses to avoid an unintended gift tax when gifting/selling hard-to-value assets. A defined value gift works as follows:

• Donor owns 100 shares of a closely-held corporation.
• Donor wants to gift 40 shares to his daughter.
• The 40 shares are valued by the donor's CPA at $5 million.
• The gift instrument states that the donor transfers that number of the 40 shares that has a FMV of $5 million, with any excess shares passing to a named charity.

Thus, upon a gift tax audit, if the value of the shares are determined to be worth more than $5 million, the excess passes to charity (where it qualifies for the charitable gift tax deduction).

In Estate of Petter, No. 10-71854 (9th Cir. 2011), the Court affirmed a decision by the Tax Court that allowed for the use of a defined value clause. In the Petter case, the 9th Circuit joins the 5th Circuit (McCord v Commissioner, 461 F. 3d 614 (5th Cir. 2006)) and the 8th Circuit (Estate of Christiansen, 586 F. 3 1061 (8th Cir. 2009)).

It is important to note that with all three cases, Petter, McCord and Christiansen, the "gift over" passed to charity. Justification for allowing gifts over the charities includes the government's public policy interest in encouraging charitable gifts, and the presumption that the charities will closely monitor the valuation process to assure they receive what they are entitled to. Whether the outcome would have been the same had the gift over passed to the donor's spouse (where the gift would qualify for the unlimited marital deduction), or to a zeroed-out GRAT, has yet to be determined. Arguably, it should make no difference to whom the gift over passes. In any event, three Circuits have now aligned on the acceptance of defined value clauses - an important estate planning tool.

For more information regarding this topic, please e-mail your requests to Julius Giarmarco, or call Julius at (248) 457-7200.

The Internal Revenue Service has not yet finalized IRS Form 8939, which allows an estate of a 2010 decedent to elect out of the estate tax regime. While the IRS has stated that it will not extend the November 15th filing deadline, it has recently issued 50 pages of guidance and instructions. The final version of Form 8939 is expected some time this Fall.

An estate that elects not to be subject to estate tax will be subject to carry over basis, with certain adjustments. The executor elects out of the estate tax by filing Form 8939. This election is irrevocable.

The IRS will generally not grant an extension of time to file Form 8939. An estate might file for relief under Treas. Reg. § 301.9100-3 in an effort to receive IRS approval of Form 8939 after the due date. However, it is not likely to be granted, since in the IRS's view there has been a sufficient amount of time since a decedent's 2010 death to file Form 8939. However, under certain exceptions, Form 8939 may be amended.

Regarding allocation of GST exemption for 2010 decedents, if the estate has elected out of the estate tax, the GST allocation may be made on Schedule R of Form 8939. Therefore, it is not necessary for an executor to file a 706 in order to allocate the GST exemption. However, if the estate does not elect out of estate tax, the executor allocates the decedent's available GST exemption on Schedule R of Form 706.

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.