As 2008 comes to a close, it is a good time to create an estate plan if you do not have one, update existing estate planning documents if you do, and examine estate tax laws to determine whether your estate tax planning tools are sufficient to minimize or eliminate any estate taxes that may be due upon death. This alert addresses 2009 changes in the gift taxes, estate taxes and generation skipping transfer taxes. It also addresses family limited partnerships and transfers from IRAs to charities.
Gift Taxes In 2009, the annual gift tax exemption will increase from the current $12,000 annual recipient per donor per year to a $13,000 annual recipient per donor per year exclusion. Thus, in 2009 an individual may give gifts to as many different people as they wish, including cash of up to $13,000 in value.
For example, a parent with two children and four grandchildren may gift $13,000 to each child and $13,000 to each grandchild. Similarly, the spouse of the gifting parent may also gift $13,000 to each of the children and $13,000 to each grandchild, thereby gifting from both parents $26,000 to each child and each grandchild.
If in 2009, the total value of the gifts given from one individual to another individual exceeds $13,000, then the excess will use as much as is needed and/or is remaining of the individual's $1,000,000 lifetime gift tax exemption. Each individual may gift up to $1,000,000 total value above and beyond the annual gift tax exclusion during his or her lifetime. This $1,000,000 exemption does not increase for 2009. The value of assets not subject to estate taxes upon the individual's death is directly reduced dollar for dollar by the amount of the $1,000,000 gift tax exemption used.
For example, if person X gifted $513,000 to person Y in 2009 then the first $13,000 would be exempt from tax because of the $13,000 gift tax exclusion. The remaining $500,000 would then use whatever amount remained of person X's lifetime gift tax exemption. If person X had not used any of his $1,000,000 exemption, then none of the $500,000 would be subject to gift tax at this time. However, upon person X's death, the amount of his estate not subject to estate tax would be reduced by that same $500,000. If in 2009, person X makes gifts totaling $1,113,000 then the first $13,000 would be exempt from taxation under the annual gift tax exclusion, $1,000,000 would be exempt from taxation under the $1,000,000 life-time gift tax exemption and the remaining $100,000 would be subject to estate tax at the 45 percent rate.
There are several estate tax planning vehicles that utilize the lifetime gift tax exemption in ways that reduce or eliminate estate taxes upon one's death.
Estate Taxes In 2009, the estate tax credit increases to allow $3,000,000 to pass estate tax free upon an individual's death, an increase from the current $2,000,000 level. As discussed above, this amount is reduced by the amount of lifetime gift tax exemption used during an individual's lifetime. There are significant estate tax planning opportunities that are generally available. One of the most basic of these tools is the use of a well-drafted trust, which, for both married and unmarried couples, can preserve part or all of the decedent's estate tax credit until the death of the second individual. Additionally, there are other estate planning tools that may be used to significantly reduce or eliminate estate taxes, including family limited partnerships, discussed below.
Generation Skipping Transfer Tax The generation skipping transfer tax ("GST") was enacted by Congress to prevent the use of overly large legacy trusts ("legacy trusts"), which were designed to prevent estate taxes from being collected from successive generations. The GST functions by applying the estate tax at its highest rate (45% in 2009) to transfers that "skip a generation." A generation is considered skipped when assets are given to a generation that is either two or more steps below the current generation, for example, where a parent gives money to a grandchild while the parent is still alive.
The GST does not apply when the intervening generations are no longer alive. Thus, if a parent gives assets to a grandchild whose parent is deceased, then the GST would not apply to the transfers to that particular grandchild. In 2009, the GST exemption amount will be $3.5 million dollars, up from the current $2,000,000 exemption amount. Unlike the estate tax credit, which cannot be used until one has passed, an individual may allocate part or all of his/her GST exemption during his/her lifetime to assets that they intend to pass to a "skipped generation."
The GST is scheduled to be eliminated in 2010 and scheduled to return in 2011 at $1,000,000. If you apply all or part of your $3.5 million GST exemption to certain assets, then to the extent it exceeds the 2011, $1,000,000 amount, you will have achieved a result of having a larger GST exemption. Your GST exemption, however, should not be applied without careful consideration, since once applied the application is irrevocable.
Family Limited Partnerships or Limited Liability Companies Family limited partnerships ("FLP") and family limited liability companies ("FLLC") continue to be useful estate planning tools. FLPs and FLLCs derive much of their estate planning benefits from the use of valuation discounts on assets. Valuation discounts function by allowing the use of what is known as a marketability discount. This is a discount derived by valuing how much the fair market value of an item would be considering the lack of marketability and control. The amount of the discount available depends upon the amount of control retained and the underlying assets to be discounted. Recent court decisions have affirmed the use of FLPs and FLLCs as effective estate planning tools. However, they have emphasized the need for careful estate planning and operation of the FLPs and FLLCs. An FLP or FLLC must have an operating purpose that goes beyond estate tax planning. The use of FLPs or FLLCs in conjunction with other estate planning tools can prove to be potent estate tax saving tools.
Transfers From IRAs to Charities In 2008 as part of the financial industry bailout, Congress passed the Emergency Economic Equalization Act of 2008 (the "Act"). The Act allows people over the age of 70 1/2 years to transfer up to $100,000 from their IRA to a public charity (not a private foundation) without having income for the amounts withdrawn. These transfers can be made now through the end of 2009. There are several restrictions including, but not limited to, who these funds are transferred to, whether a benefit is received for the transfer, and the level of control over the funds once transferred. These transfers can provide significant tax benefits to the donor. However, in order to determine the level of benefit to be derived as well as to ensure that none of the restrictions are violated it is suggested that you contact Buchalter Nemer or your tax advisor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.