These changes in the law provide an ideal opportunity to review your current estate plan:

Federal Estate Tax

The federal exemption for estate tax has increased from $2,000,000 to $3,500,000 for 2009. The estate tax is currently scheduled to be repealed in 2010 and reinstated in 2011 with an exemption of $1,000,000.  I believe that Congress may finally change the law in 2009.  Stay tuned for further updates.

Maryland, D.C. and Virginia Estate Tax

The Maryland and D.C. estate tax exemption remains at $1,000,000.  This means that an estate may be subject to Maryland or D.C. estate tax (or another state’s estate tax) even if it is not subject to federal estate tax.  This change has a significant impact on wills and trusts created before 2001.   However, there is no estate tax in Virginia.  Other states have different exemption levels.  Please check with your tax advisor.

Generation Skipping Tax

The federal generation skipping transfer (“GST”) tax exemption has increased to $3,500,000 for 2009 and is scheduled to be repealed in 2010.  The GST tax will be reinstated in 2011, with an exemption level of approximately $1,400,000.  This change affects certain wills and trusts created before 2001 with GST provisions. 

Gift Tax

The annual exclusion has increased from $12,000 to $13,000 for 2009.  Thus in 2009, each person may now transfer up to $13,000 to an unlimited number of individuals free of gift tax.  This change impacts various aspects of planned annual gifting, including the payment of life insurance premiums on policies that are held in an irrevocable trust.

The annual exemption for gifts to a non-citizen spouse has increased from $120,000 to $133,000.  Thus in 2009, a spouse can transfer up to $133,000 to their non-citizen spouse free of gift tax.

The lifetime exemption for gift tax remains at $1,000,000.  As such, the federal gift tax exemption is not equal to the federal estate tax exemption.  This impacts gifting strategies and overall estate planning.

Inheritance Tax

Maryland’s inheritance tax remains unchanged.  Assets distributed to “collateral heirs” at death are subject to a 10% Maryland inheritance tax.  Generally, collateral heirs are individuals other than spouses, parents, children, grandchildren, step children, spouses of children and grandchildren and brothers and sisters.  D.C. and Virginia do not have an inheritance tax.  A few other states have an inheritance tax.  Please check with your tax advisor.

IRA Charitable Rollover

The Emergency Economic Stabilization Act of 2008 (signed into law on October 3, 2008) extended the IRA charitable rollover to all distributions made between January 1, 2008 through December 31, 2009. Taxpayers age 70 ½ and above may donate up to $100,000 from their IRA’s to a public charity and the donated amount will be excluded from the taxpayer’s income.  The donation counts towards the taxpayer’s required minimum distribution amount for the given year.

“Estate Planning in 2009” – What Changes the New Administration May Bring

By:  Gary Altman, Esq.

It’s the beginning of the New Year and in a few short weeks, Barack Obama will take office as President of the United States.  As we all well know, “change” has been the primary theme and driving force behind the incoming administration.  And while the entire world waits anxiously to see what those changes will entail, we in the estate planning profession are keeping an especially close eye on one thing in particular - the federal estate tax.

Current Law – In 2009, the value of an individual’s estate that can qualify as exempt of federal estate tax - known as the “applicable exclusion amount” - stands at $3.5 million.  (This is up from $2 million in 2008.)  Assets in excess of the applicable exclusion amount are subject to a maximum federal estate tax rate of 45%.  And, while current law provides for a repeal of the federal estate tax in 2010, it further provides for the reinstatement of the federal estate tax for 2011 and beyond with an applicable exclusion amount of only $1 million and a 55% maximum federal estate tax rate.

Looking Back and Ahead – During the 18 month-long campaign season, President Elect Obama (in an effort to appeal to both liberal and conservative voters) proposed freezing  the applicable exclusion amount at $3.5 million, with the tax rate, for estates in excess of that amount, at 45%.  The problem with this proposal is that it was made prior to the unfolding of current economic crisis.  For that reason, many estate planning professionals fear that the government (desperate for revenue sources) may be compelled to lower the applicable exclusion amount (broadening the pool of people eligible for the tax) and likely raise the federal estate planning tax rate.

Additional legislation that may be considered by the government, include:

1. Eliminating the use of Qualified Personal Residence Trusts as a device to save estate taxes on the value of an individual’s home.
   
2. Restricting the utility of Grantor Retained Annuity Trusts by requiring a remainder interest (i.e., a taxable gift, subject to gift taxation) equal to at least 10% of the value of the property transferred.
   
3. Invalidating discounting techniques involving “family limited partnerships” and fractional interest discounts unless they involve an actual for-profit business.

Time is Of the Essence –Soon after the inaugural dust (or confetti) settles, we could see quick action on tax laws.  Major tax bills often occur in the first year after a presidential election (1997 and 2001, for example).  What’s more is that it is possible (as well as constitutional) for laws to be made effective retroactively to the beginning of the year.  Thus, it has never been more important to have your estate plan reviewed and updated.

Gary Altman, Esq. is the Principal and Founder of Altman & Associates, an estate planning law firm in Rockville, MD.  He can be reached on 301-468-3220 or via email at gary@altmanassoicates.net.  To learn more, visit www.altmanassociates.net.

Copyright © 2009 by Gary Altman, Esq.  All Rights Reserved.