The Tax Foundation, a nonpartisan group that describes itself as favoring simplicity, transparency, neutrality, stability, etc. in our tax system, recently published a report which concludes that the federal estate tax will “return from the dead” on January 1, 2011 even though “the arguments for making repeal permanent are strong.”

A full copy of this report is available via link from the Tax Foundation website at http://taxfoundation.org/publications/show/26360.html.

Houston gas mogul, Dan Duncan, was the 74th richest person in the world when he died last month.  His $9 Billion estate might have meant upwards of $4 Billion for the IRS, however, with no federal estate tax imposed this year, they get nothing.

This scenario, some believe, could encourage lawmakers to push to retroactively impose an estate tax.  Others say that doing so would result in mayhem - law suits and headaches that could last for years.

If no action is taken, the estate tax will reset in 2011 with an exemption of $1 million and a maximum rate of 50%.  Of course, we’ll be watching closely and reporting on any changes.

As my readers are aware, all of us in the estate planning community have been following the mess that Congress created by not passing any sort of law to set the estate tax limits at a permanent level.  As most people now know, the estate tax was repealed effective, January 1, 2010, but is scheduled to be reinstated in 2011 at a rate of 55%.

As a result, many States have taken action and legislatures are introducing bills that would require all estate and trusts to be interpreted as if someone died on December 31, 2009, unless Congress acts to clarify the estate tax law.  On January 12, Virginia was the first state to propose taking action with Maryland, New York and Georgia following closely behind.  The point of this legislation is to carry out what the deceased intentions were and to provide closure and a clear answer to families who are in disagreement where a recent death could result in litigation.  As we discussed in previous blogs an unintended consequent of Congress not acting was there is no “applicable exclusion amount” in 2010.  As a result many estate documents could unintentionally disinherit a spouse or could unintentionally not create a “bypass” trust that will save estate taxes, if any, upon the surviving spouse’s death.  These bills could pass by the end of February and made retroactive to January 1 unless Congress acts.  Federal law always takes precedent. 

*Footnote:  Missouri, the District of Columbia, South Dakota, Minnesota, Tennessee, Indiana, Florida, Ohio, Wisconsin and today Delaware are all drafting legislation to address estate planning documents for decedents dying in 2010 in their respective States.

Also, with the release of the budget yesterday, it appears the office of OMB has indicated that the 2009 level would apply in 2010.  The Wall Street Journal also reported that President Obama has proposed reinstating the estate tax to the levels of 2009 with a $3.5 million exemption with a 45% marginal rate to be extended permanently.  There are different income tax proposals which would eliminate some of the 2001 tax cuts at top rates.

Stay tuned.  I will be writing more on this subject as news breaks.  If you have any questions about your own specific situation or estate planning documents, please send me an email.

Serves me right, I go on a wonderful 10 day vacation from work and look what happens:  Congress finally passes an estate tax bill.  The full story is that the House has passed a bill that would permanently FREEZE the applicable exclusion amount (i.e., the amount that passes free of Federal estate tax) to 3.5 million and FREEZES the rate at 45%.  The Senate will now take up the passed House bill.  Then, if the Senate makes any changes, it goes to a conference committee.
 
The good news:  Something may happen before the end of this year to end the uncertainty.  AND the bill that passed the House does not change any other aspect of the estate tax laws (other than repealing carryover basis, which would have been a disaster anyway).  Therefore, GRATS, valuation discounts and other estate planning tax reduction techniques are still viable.
 
The bad news:  Anything can happen and NOTHING is permanent.  Hence, Congress can still act before the end of this year to eliminate or restrict GRATS and valuation discounts.  Clients should not be lulled into a false sense of security.  Action should be taken as soon as possible before Congress closes the door on these techniques.

A recent article on TheHill.com, Debate Over Estate Tax Likely to Wait Until 2010″, suggests that a split among Democrats and a busy fall agenda is likely to have lawmakers hold off this year on debating the future of the estate tax, even though it is set to expire at the end of the year.

Many experts forsee that the most likely scenario for estate tax reform is a one-year extension on current estate tax laws which would buy Congress time to make broader reform in 2010.

We will, of course, be following this closely!

Currently, up to $3.5 million of an estate’s value is exempt from Federal estate tax for deaths occurring in 2009.  In 2010, the estate tax is scheduled to expire for a period of one year, returning in 2011 with a lower $1,000,000 exemption.  That is, unless Congress has anything to say about it.

Estate taxes have become a major source of revenue for the Federal government and chances are good that Congress is not to let the estate tax expire even for one year.  We in the estate planning community are keeping a watchful eye on this, knowing that chances are good that Congress will enact legislation in order to avoid the full repeal of the estate tax.

Many states, including Maryland, have moved away from the Federal exemption and exclude only $1 million.  Therefore, even if you are exempt on a Federal level, your estate may still be exposed to State estate taxes.  

Advanced planning is the only way to shield against any estate tax.

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Some things to consider:

Leaving Your Entire State to Your Spouse

The majority of married couples leave everything to the surviving spouse in their wills. In some cases, this can be advantageous.  However, in others, it can mean paying substantial and avoidable estate taxes when the second spouse dies.

Reduce the Size of Your Estate Through Gifting

Using the annual gift tax exclusion of $13,000 per recipient can reduce the size of your estate.  If your spouse joins in the giving, you can transfer up to $26,000 to any number of recipients during the year.

Establish an Irrevocable Life Insurance Policy

In most cases, the proceeds of life insurance policies are subject to tax as part of one’s estate.  Establishing an irrevocable life insurance trust as “owner” of the policy can shelter the proceeds from estate tax.

In response to a budget crisis, the Delaware Legislature and Governor reinstated into Law the Delaware Estate Tax for people dying on or after July 1, 2009.  This new tax will be tied to the federal state death tax as it existed in January 2001 and applies to estates of $3.5 million or more.  After the elimination of the federal state death tax credit in 2005, one of the legacies of the Economic Growth and Tax Relief Act of 2001 (2001 Tax Act), over half of the states in the union lost their estate tax revenue, or they simply decoupled from the federal system altogether to prevent revenue loss.

For example, Virginia had a separate state death tax that they repealed.  This year, in Virginia, three bills have been introduced to create a new estate tax hoping to create over $100 million in revenue for the State.  All of these proposed bills have failed to pass in the legislature.

What this all means:  States facing large budget deficits along with the growing economic challenges are once again looking at “estate taxes” as a means to buffer or balance their budgets by taxing the deceased.

As always, we will be following all of the local jurisdictions in regard to their estate tax laws.  Currently, as stated above, Virginia does not have an estate tax, while Maryland and D.C. both have an estate tax on estates valued at over $1.0 million.

I have heard that members of a House and Senate negotiating committee have worked out a compromise on estate tax reform.  While details are still not know, it appears that the estate tax would be kept permanently at the 2009 levels.  This means that individuals could exempt $3.5-million from Federal estate taxes and a couple, with basic estate tax planning, could exempt $7-million from Federal estate taxes.  Estates over these amounts would be taxed at a 45 percent rate.

Stay tuned for more breaking news.

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.