Significant Changes in Estate Tax Law

With the arrival of the new year come significant changes in the federal estate and gift tax laws. Furthermore, it is safe to say that many more changes may be on the horizon. You should be aware of these recent changes and look for potential additional changes as the year progresses.

Effective January 1, 2009, each individual taxpayer has a federal estate tax exemption of $3.5 million. This increase of $1.5 million per person allows couples with properly structured trusts to shelter $7 million from federal estate taxation. Given a federal estate tax rate of 45%, this development provides for significant savings for both couples and single individuals.

Likewise, the generation-skipping transfer tax exemption has been increased to $3.5 million per person. This change permits individuals to maximize the wealth that they can pass on to future generations by implementing “dynasty trusts,” which can provide for multiple generations, while avoiding estate taxation in children and grandchildren’s estates. Individuals should consider this technique as part of their plan to take advantage of the increased exemption.

From a gift tax perspective, the annual exclusion gift has been increased to $13,000 per person per year. This increase allows couples to split gifts and essentially give away $26,000 per donee each year, without using any portion of their federal estate and gift tax exemption. This is yet another benefit for individuals that are attempting to transfer wealth during their life and avoid unwanted federal estate taxes on those donated assets.

Concerning potential changes in tax law, there has been much speculation as to what will happen with the estate tax laws in light of the recent presidential election. During his campaign, President Barack Obama indicated that he would not likely increase the federal estate tax exemption further (although there have been many discussions in Congress of increasing the exemption to $5 million per person). Similarly, President Obama has indicated that he would not decrease the federal estate tax rate from the current 45% level.

That being said, it would be wise to continue to pay attention to the news as the current law will expire in 2011, at which time the federal estate tax exemption will revert back to only $1 million per person. This significant decrease in exemption would seriously hurt those who have been the beneficiaries of the rising exemptions since 2001. Accordingly, it seems very likely that Congress will enact some sort of change during the 2009 year. We will, of course, endeavor to notify all of our clients when this tax change arises.