Those who manage the wealth of the rich and super-rich are warily eyeing an Obama administration budget proposal for 2013 that would require people who create trusts, known as grantors, to include the assets of their trusts in their own estates for estate tax purposes.
While it sounds like a fairly logical proposal, in reality it would undo years of tax policy in which the income tax rules and the estate tax rules have been kept separate.
More importantly, it would force many people to pay estate tax on trusts they set up specifically to avoid that tax. This includes some pretty big players, such as life insurance companies and S corporations, but it also includes everyday people like you and me.
Currently the law treats a grantor and a trust as the same person when it comes to paying income tax. If there are transfers between the two, no income tax is paid. And in addition, under the current estate tax rules, some grantor trusts are considered to be separate from the person who created the trust so there is no estate tax on the trust assets when the creator of the trust dies. All that would change if Obama is successful in merging the income tax rules and the estate tax rules.
Obama Estate Tax Budget Proposal Keeps Wealthy Jumpy – Bloomberg