by  /  Estate Planning, Retirement Planning, Tax Planning

Last month, the President proposed his FY2016-17 budget request for the Federal government. Congress often considers these provisions while developing its own budget resolution, and they are recorded in Treasury’s Greenbook.  Intermittently, Congress actually passes a budget, as it did for the first time in seven years in December 2015. It is unlikely that any material tax legislation will be passed during this 2016 election year, so the President’s proposals are not likely to be approved. Nevertheless, the President’s proposals indicate what is on Washington’s “radar screen,” in terms of “crackdowns” or “loophole closers,” such as the ending of the file-and-suspend and restricted Social Security claiming strategies last fall.  Because we are always predicting the future implications legislation might have on our planning process, it is worthwhile to discuss some of the impacts of such proposals before they are about to be approved.


We plan to investigate the changing retirement landscape in detail in future submissions, but some of the budget proposals deserve mention here. There seems to be an overriding goal of limiting the use of common retirement planning tools by affluent taxpayers.

  • Prevent new retirement plan contributions for taxpayers with more than $3.4 million in account balances. The government will determine what we need in retirement plans, versus what must be in taxable investment accounts.
  • Eliminate “backdoor” Roth IRA contributions. Roth IRAs are an essential piece of the retirement planning puzzle that we will discuss at length in the future. The “backdoor” approach is merely a tactic for taxpayers whose adjusted gross income (“AGI”) exceeds limits for a normal Roth IRA contribution, to convert after-tax dollars into a Roth IRA.
  • Required Minimum Distributions (“RMDs”) required for Roth IRAs at age 70 1/2. Currently required only for traditional IRAs.
  • Eliminate Stretch IRA which require non-spouse beneficiaries to use the 5-year distribution rule, rather than their life expectancy.
  • Eliminate the preferred treatment of Employer stock liquidated in a retirement plan after retirement.


  • Reduce estate tax exemption from current $5.4 million to $3.5 million (the 2009 level).
  • Eliminate Step-Up in Basis at Death and replace with deemed-sale-at-death, resulting in significant capital gains taxes for beneficiaries.
  • Establish 10-year minimum term for GRATs, gutting the common tactic of using multiple short term GRATs. Discussion of use of GRATs to freeze estates is beyond today’s topic.
  • Similarly, requiring property sold to an Intentionally Defective Grantor Trust (“IDGT”) to be included in the taxpayer’s estate guts the tactic, but is for discussion another day.
  • Prohibit Dynasty Trusts, limiting their duration to 90 years.
  • Replace unlimited present interest gifts with “crummy” notices to get them under the annual gift exclusion with a new class of future interest gifts that are permitted up to $50,000 per year to trusts or of pass-through entity interests.


  • Increase maximum capital gains tax rate from 20% to 24.2%, which becomes 28% when the 3.8% Medicare surtax on net investment income is added.
  • Limit annual 1031 Like-Kind Exchanges of Real Estate to $1 million per year. Anything over would be taxable capital gain.
  • Apply the 3.8% Net Investment Income Medicare Surtax to S corporation distributions, limiting the tax advantage of pass-through S corporation treatment.
  • Require average cost for all stock sales (as has been the case for mutual funds), rather than specific lot identification (“cherry-picking”) for tax-loss harvesting purposes.

The provisions discussed above are used in income tax planning to a similar extent that the voided “file-and-suspend” tactic was used in retirement planning prior to its termination. Passage of these proposals will have a material impact on tax planning.  The outcome of the Presidential election is likely to have a significant influence on the ultimate passage of these ideas into law. STAY TUNED!


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.