The Administration’s FY 2013 Estate and Gift Tax Proposals 

 July 6, 2012 

The Honorable Timothy F. Geithner
Secretary of the Treasury
U.S. Department of Treasury
1500 Pennsylvania Avenue
Washington, D.C. 20220

RE: The Administration’s FY 2013 Estate and Gift Tax Proposals 

Dear Secretary Geithner:

The Association for Advanced Life Underwriting (the “AALU”) appreciates the opportunity to provide comments to the Treasury Department regarding provisions relating to estate planning proposals contained in the Administration’s Fiscal Year 2013 budget (“FY 2013 budget” or “budget”).

The AALU is a nationwide organization of approximately 2,300 life insurance agents and financial professionals who are primarily engaged in the sale of life insurance products used as part of estate, business continuation, charitable, retirement, deferred compensation and employee benefit planning.

This letter speaks largely to the policy underpinnings and practical impact of specific estate and gift tax-related issues addressed within the FY 2013 budget. These issues relate to the public policy imperative of permanent, sustainable estate tax reform that creates a reliable tax environment in which one can plan responsibly over long periods of time.

Specifically, we: (1) commend the Administration for proposing lifetime exemption levels and rates that are fiscally sustainable; (2) urge the Administration to adopt as part of its estate and gift tax reform proposals unified estate and gift tax lifetime exemption levels as contained in current law; and (3) urge that the Administration not pursue congressional consideration of its proposal to “Coordinate Certain Income And Transfer Tax Rules Applicable to Grantor Trusts.” (the “Grantor Trust Proposal” or “proposal”).

Need for Permanent and Sustainable Estate Tax Reform:

 The AALU commends the Administration for proposing the enactment of lifetime exemption levels and rates ($3.5 million/45%) in its FY 2013 budget which we believe are fiscally sustainable parameters. The AALU and its members have been strong and long-time advocates for permanent, sustainable estate tax reform.

It is important for AALU members and their clients to operate with certainty if they are to effectively plan for the long-term. If families and business owners are faced with continually fluctuating estate tax lifetime exemption levels, rates, and underlying technical provisions, they are less likely to engage in estate and business succession planning. This leads to unsuccessful transfers to succeeding generations and problems for the family members, employees, and businesses left behind.

In addition, such failure or delay in planning may limit or impair their options. Most estate or business succession planning exercises are typically executed over multiple decades. The Administration’s proposal is therefore consistent with a key priority stressed by the AALU—that estate tax reform integrates parameters that can be sustained for a long period of time in light of current fiscal constraints and economic considerations.

Permanently Maintain Unified Estate and Gift Tax Exemptions: 

The AALU urges that the Administration also support a feature contained in current law, included in legislation addressing estate tax parameters passed in December 2010. This feature—the reunification of gift and estate tax exemption levels—has broad bipartisan backing in both the U.S. House of Representatives and the U.S. Senate. The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (“TRA”)1 included provisions to reunify the lifetime exemptions applicable to the estate and gift taxes, which had previously been unified until 20012. This decoupling created a perverse incentive for business owners to retain their assets until death rather than significantly increasing stability in business succession by making responsible intergenerational transfers during life.

Unified estate and gift tax credits encourage earlier transfers, which in the business succession context creates incentives for the next generation to participate in the management and development of the business, providing successors with important experience and a more significant financial interest in the success of the business. In this way, unified estate and gift tax credits help reduce intergenerational business failure and the economic and job losses that can result. Data show the imperative for improvement in this area: although 27% of family businesses are expected to change hands in the next five years, 47% of businesses have no business succession plan, and 62% have not planned for the prolonged incapacity or death of a key manager or employee. 3

Maintain Ability to Use Well-Established Estate Planning Tools, Including Grantor Trusts:

In addition to permanent, sustainable and unified estate and gift tax lifetime exemption levels and rates, it is important that estate tax legislation continue to enable use of flexible and well-established tools to plan for succeeding generations and fund any future liabilities. We therefore oppose the Grantor Trust Proposal now included in the Administration’s FY 2013 budget, which would impose adverse tax consequences that would, as a practical matter, significantly limit estate planning with grantor trusts.

Only a general rationale is given for the Grantor Trust Proposal—that lack of coordination between the income and transfer tax treatment of grantor trusts creates potential for tax avoidance. However, it would appear in practice that existing trust and transfer tax laws do not produce such a result. For example, the Treasury Department has estimated that this proposal would produce $910 million in revenue in fiscal years 2013-2022.4 As a point of reference, under the Administration’s proposal to restore the estate, gift, and generation-skipping transfer taxes to their 2009 parameters – a proposal that would, compared to current law, subject approximately one additional estate out of every thousand estates to transfer tax liability5 – an estimated $118.8 billion in revenue would be produced.6

These revenue estimates suggest the Grantor Trust Proposal would do little to mitigate any purported tax avoidance, but would nonetheless have a meaningful and harmful practical effect on planning, as described below.

Origins And Purpose of Grantor Trust Rules And Grantor Trusts:

The “grantor trust” income tax rules in the tax code have their genesis in federal tax legislation and cases dating from the 1920s attempting to address the efforts by certain high bracket taxpayers to shift the taxation of income to trusts and their beneficiaries in a lower bracket. In Helvering v. Clifford, the U.S. Supreme Court ruled against an attempt to shift income to a lower bracket. 7 In response, the Treasury Department promulgated the so-called “Clifford” regulations8 and subsequently, through the regulations now codified under §§671-679 of the Internal Revenue Code (“IRC”), the Treasury Department addressed the problem of both income-shifting and imposed restrictions on continued control of assets. Under these tax code provisions and associated regulations and rulings, a grantor trust’s assets are treated and taxed as if they are still owned by the trust’s creator or “grantor” for income tax purposes, and the grantor pays the trust’s income tax liability. Under the IRC9 and guidance provided through Treasury Department rules and rulings, including some issued as recently as 2004 and 2007: 10

  • No gain or loss is recognized on a sale of property from the grantor to the trust;
  • No gift tax payments are due on a sale to the trust or on further distributions from the trust to the beneficiaries;
  • The grantor continues to be taxed individually on all income generated by assets held by the trust, just as though it did not exist;
  • The grantor’s payment of taxes on the trust’s income that results from this tax obligation does not constitute a gift for gift tax purposes in the absence of any unexercised right of reimbursement from the

In recent decades, much effective estate planning has been conducted, including planning with life insurance trusts, which relies on and complies with long-established grantor trust rules. A “grantor trust” is a trust, which may be revocable or irrevocable, of which an individual is treated as the owner for income tax purposes, but not for transfer tax purposes.  The vast majority of life insurance trusts are grantor trusts, whether by design or by reason of IRC

  • 677(a)(3), which states that any trust or portion of a trust the income from which can be used, without the consent of an adverse person, to pay the premiums on policies of insurance on the life of the grantor or the grantor’s spouse is a grantor trust. 11
Administration Grantor Trust Proposal:

It appears from the Treasury’s Greenbook that the Administration’s Grantor Trust Proposal was prompted by a concern that the lack of coordination between the income andtransfer tax rules “creates opportunities to structure transactions between the deemed owner and the trust that can result in the transfer of significant wealth by the deemed owner without transfer tax consequences.” However, rather than laying forth a rule which identifies specific concerns and targeted changes to existing law to address them, the Administration’s Grantor Trust Proposal instead is extremely broad, both in its scope and the harm it could do to estate, business continuation, and life insurance planning.

The Administration’s Grantor Trust Proposal would provide that, to the extent that the income tax rules treat a grantor of a trust as an owner of the trust:

  1. The assets of that trust would be included in the gross estate of that grantor for estate tax purposes;
  2. Any distribution from the trust to one or more beneficiaries during the grantor’s life would be subject to gift tax; and
  3. The remaining trust assets would be subject to gift tax at any time during the grantor’s life if the grantor ceases to be treated as an owner of the trust for income tax purposes.

Imposing adverse tax consequences contained in the Administration’s Grantor Trust Proposal would, as a practical matter, significantly limit effective estate planning with grantor trusts—planning which is used both to fund payment to the federal government of transfer taxes while protecting illiquid estates such as farms, ranches and small businesses, as well as providing for spouses (original and subsequent marriages) and families.

The AALU Urges the Administration to Drop Its Grantor Trust Proposal:

The AALU urges that the Administration not pursue Congressional consideration of the Grantor Trust Proposal and the Treasury to consider factors such as the following on this matter:

  • Some level of the coordination issues cited generically by Treasury for the Grantor Trust Proposal is inevitable given the government’s task of imposing multiple types of independently complex tax regimes—income, gift, estate and generation-skipping—on taxpayers.
  • However, as stated above, the Treasury Department’s estimated revenue effect of $910 million over a ten-year budget window suggests that current laws do not create an environment that fosters tax
  • In fact, the grantor trust rules continue to serve useful functions, consistent with other provision of the code, including the discouragement of income-shifting to lower-bracket tax-payers. 12

Families and businesses need continued access to flexible and well-established tools to plan for succeeding generations, to implement effective business succession plans, and to ensure liquidity for future liabilities. As part of the tax code since 1954, grantor trusts serve these important purposes and represent a core component of most life insurance and estate plans. The Grantor Trust Proposal, however, would, as a practical matter, significantly limit estate planning with grantor trusts.

  • We note that the Grantor Trust Proposal would have the effect of undermining the larger public policy goal shared by the Administration and the AALU—namely, permanent, reliable estate and gift tax laws that facilitate responsible long-term planning. If such a regime were enacted by Congress, it would be counterintuitive to then limit the planning options available under such a regime—particularly when no alternative empirical explanation has been provided for doing

The AALU appreciates the opportunity to provide input on important estate tax provisions contained in the Administration’s FY 2013 budget.

We commend the Administration for its recognition of the importance that estate and gift tax reform be enacted that can be sustained over the long-run, in light of current fiscal constraints and economic considerations. Families and businesses—often planning over 30, 40, or 50 year windows—must be allowed to do so with certainty and within a sensible, stable transfer tax regime.

We urge that the Administration continue its support permanent, sustainable estate tax reform, and to maintain unified estate and gift tax exemption levels. This makes for sensible tax policy and will facilitate successful intergenerational transfers of family businesses and other assets. Increasing the number of family businesses that survive from one generation to the next can assist with job retention and promote greater economic stability.

Finally, it is vital that families and businesses have continued access to flexible and well- established tools to plan for succeeding generations and fund any future liabilities. This includes the ability to effectively plan through the use of grantor trusts under a long-established set of principles, rules, and regulations enacted by Congress and the Treasury Department. We therefore urge that the Administration not pursue Congressional consideration of the Grantor Trust Proposal because it would limit proven, widely used estate planning options and could complicate the already difficult task of enacting sensible, fiscally sustainable estate tax reform.

We appreciate the opportunity to submit comments and would be pleased to further discuss these important planning issues. If you have questions, please contact Chris Morton at 202-772-2494 or at



David J. Stertzer
Chief Executive Officer

cc: Catherine Hughes, Estate and Gift Tax Attorney Advisor



1 The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, 124 Stat. 3296 (2010) (codified in scattered sections of 26 U.S.C.).

2 The Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, 115 Stat. 38 (2001) (codified in scattered sections of 26 U.S.C.) (Under Title V of the Act, the lifetime exclusions applicable to the estate and gift taxes were disjoined.).

3Jacques Lesieur et al., Kin in the Game, PWC Family Business Survey 2010/11 at 18-24 (2011), available at:

4 Office of Mgmt. & Budget, Exec. Office of the President, Budget of the United States Government, Fiscal Year 2013 at 208 (2012).

5 Tax Policy Center, Taxable Estates, Estate Tax Liability, and Average Estate Tax Rate by Size of Gross Estate, 2011 (2011), available at:

6 See FY 2013 Budget Summary Tables, supra, note 4 at 208.

7 See Helvering v. Clifford, 309 U.S. 331 (1940).

8 See T.D. 5488, 1946-1 C.B. 19 (1945).

9 26 U.S.C. §§ 671-679 (2006). (Commonly referred to as “Subpart E – Grantors and Others Treated as Substantial Owners”).

10 See Rev. Rul. 2004-64, 2004-2 C.B. 7 (2004). See also Rev. Rul. 2007-13, 2007-1 C.B. 684 (2007).

11 26 U.S.C. §677(a)(3) (2006). See also Rev. Rul. 2011-28, in which the IRS concluded that the retention, in a nonfiduciary capacity, by the grantor of a life insurance trust of a § 675(4)(C) “power of substitution” over trust assets will not be viewed as the retention of an “incident of ownership” in the policy under § 2042. Rev. Rul. 2011- 28, 2011-49 I.R.B. 830 (2011).

12 We note that the so-called “kiddie tax” was enacted and has been expanded for this purpose. See The Tax Reform Act of 1986, §1411(a), Pub. L. No. 99-514, 100 Stat. 2085, 2714-15 (codified as amended at I.R.C. §1(g) (2008)).

See also, e.g., The Tax Increase Prevention and Reconciliation Act of 2005, §510(a), Pub. L. No. 109-222, 120 Stat. 345, 364 (codified as amended at I.R.C. §1(a) (2008)). We note further that with the compression of the rate table for trusts, all but $11,350 of a trust’s taxable income is taxed at the highest marginal rate. See TheTax Reform Act of 1986, §101(a), Pub. L. 99-514, 100 Stat. at 2096-97 (codified as amended at I.R.C. §1(e) (2008)). See also Rev. Proc. 2011-12, 2011-2 I.R.B. 297 (2010) (Table 5 – §1(e) – Estates and Trusts).


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