President Obama has tipped his hand on key components of this evening’s State of the Union address.  It has been widely publicized that the President will announce several proposed tax increases.  In particular, he is proposing that the top capital gain tax rate be increased to 28% (as it was during the President Reagan years).  It’s widely reported that the current rate is just 20%, however, that is misleading, as due to Obamacare, there is an additional 3.8% net investment income tax on capital gains, which means long term capital gains are really taxed at a 23.8% rate. 

 

Notably, President Obama will also take a swipe at “trust fund loopholes”.  Unfortunately, not much has been revealed on what he thinks those loopholes really are.  Some have suggested that it relates to the step-up in basis rules for those who die, but that rule doesn’t depend on the existence of trusts.  It’s my hunch that the President will instead take aim and popular (albeit vilified) techniques that use grantor retained annuity trusts and intentionally defective grantor trusts.  In fact, President Obama’s proposed 2015 budget, called the Green Book, has a list of trust planning techniques that the administration finds objectionable.  High on this list are “Crummey Trusts” or trusts with a limited right of withdrawal that allows for annual exclusion gifts to be made to the trust, as well as short-term GRATs. 

 

Hopefully, tax-advisors can get some more clarity at tonight’s State of the Union.