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Prepare For Change


February 4, 2009

Read Time

4 minutes


Interviewed by Elizabeth Grace Saunders

Change is coming. Both a change in the presidency and a change in tax laws add urgency to estate planning. If you don’t take action now, you could miss out on millions of dollars of exemptions.

“In this turbulent financial environment, it is important for our new President and Congress to address estate tax legislation and play a vital role in stabilizing the estate planning world,” says Sheri Warsh, partner in the Asset Planning & Preservation Service Group at Levenfeld Pearlstein, LLC.

Smart Business asked Warsh what changes to expect and how to protect assets now.

What’s the current status of estate tax legislation?

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which established gradually increasing exemption amounts while simultaneously reducing the estate tax rates through 2009. In 2009, the exemption will rise to its highest level at $3.5 million
with a maximum 45 percent tax rate. In 2010, the estate tax will be repealed.

Without congressional action to reform the existing estate tax laws or make the estate tax cuts permanent, in 2011, the estate tax scheme will revert back to the 2001 levels of a $1 million exemption and a top tax rate of 55 percent.

What kind of exemption and tax rate changes could happen under the Obama administration?

During Obama’s campaign, he proposed freezing the estate tax exemption and rate at 2009 levels. His proposal sets the exemption at $3.5 million per person or $7 million per couple with a corresponding tax rate of 45 percent. This would result in about 8,000 estates per year owing taxes, or the equivalent of a mere .3 percent of all descendants.

Portability of the exemption between spouses is another area of contemplated change by the Obama administration. Under the current law, when one spouse dies without having used the estate tax exemption, it is lost and cannot be used by the surviving spouse. The proposals would
allow a spouse to transfer his or her exemption amount to the surviving spouse without setting up trusts to shelter the exemption amount. This could drastically change how estate-planning documents are currently drafted.

What are potential changes in permissible legal structures?

A Democratic-controlled White House and Congress, coupled with the current economic climate, have caused rumblings of additional estate tax reforms. One such change limits the availability of family limited partnerships and limited liability companies as a method of gifting assets to younger generations at discounted values.

Another possible modification is the elimination of the zeroed-out Grantor Retained Annuity Trust (GRAT), which allows an individual to transfer assets to a trust without a resulting gift while receiving an annuity for a fixed number of years. Legislation could mandate a taxable gift upon creation of a GRAT equal to percentage of the assets gifted to the trust. One last rumored reform
is restricting or abolishing the use of split interest charitable gifts. A split interest charitable gift allows an individual to make a gift today, while retaining an interest in the property and receiving immediate and longer-term tax benefits.

How soon could these laws come into effect?

It is possible that major tax legislation will not be introduced until the second half of 2009 or even 2010. However, if Obama does not want to let the estate tax be repealed as scheduled in 2010 or allow the estate tax regime to revert to a $1 million exemption and 55 percent tax rate, tax reform will need to be addressed by the end of 2009.

What legal strategies can help safeguard assets?

I recommend taking these actions as soon as possible:

  • Take full advantage of both spouses’ estate tax exemptions through the use of available credit exemption and marital deduction planning.
  • Maximize the use of the $13,000 annual gift tax exclusion. This allows all taxpayers to give $13,000 ($26,000, if married with spousal consent) per donee. You can have an unlimited number of donees, and they don’t have to be relatives.
  • Make gifts on behalf of any individual for education or medical care. These payments,
    as long as paid directly to the service provider or educational institution, are unlimited and do not reduce your gift tax annual exclusion or estate tax exemption amount.
  • Establish a GRAT, especially in light of today’s low interest rates.
  • Utilize family limited partnerships and limited liability companies to manage family wealth and sell or gift interests to take advantage of valuation discounts.
  • Set up an irrevocable life insurance trust to provide liquidity to pay estate taxes.
  • Establish charitable remainder trusts or charitable lead trusts.

Filed under: Trusts & Estates

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