February, 2009

Alert to our clients on recent Estate and Gift Tax updates

With new Estate and Gift Tax Rules effective for 2009, we wanted to inform our clients of the new rules. We encourage you to revisit your current wills, trusts and other estate planning documents to ensure that the provisions in effect still have the impact you originally intended. In addition, there are opportunities to seize and possible problems to avoid in this low interest rate, declining asset value environment.

• The federal estate tax exemption has increased to $3,500,000 per decedent in 2009 from $2,000,000 in 2008. In 2010 there is no federal estate tax.

• After 2010, the federal estate tax exemption will revert to $1,000,000.

• The highest federal estate tax rate in 2009 is 45%, as it was in 2008.

• In 2010, the highest federal estate tax rate will be increased to 55%.

• There is no change in the generation skipping transfer exemption amount in 2009.

• The annual gift tax exclusion has increased to $13,000 per person per donee for gifts of a present interest. This is up from $12,000 in 2008.

• Contributions to 529 plans may be made in one year, and be treated as if they were made over five years, taking the immediate exclusion of $13,000 * 5 or $65,000 in 2009.

• Gifts to noncitizen spouses are limited to $133,000 in 2009, up from $128,000 in 2008.

• The lifetime gift tax exclusion continues to be $1,000,000 per person in 2009 and 2010.

• In 2010, the maximum gift tax rate is 35%. After 2010, the maximum gift tax rate increases to 55%.

• In 2010, a modified carryover basis rule for inherited property will commence: the heir’s basis is the lower of the adjusted basis in the property in the hands of the decedent, or the fair market value of the property on the date of the decedent’s death. However, an important part of this rule is that the executor can step up the basis of estate property by $1,300,000 for the first spouse to die or by $3,000,000 for a surviving spouse.

• There are new reporting requirements for the executors to implement this new carryover basis rule. An executor will make the informational filing and then give statements within 30 days of the date the return filed to the heirs, providing particulars of the basis.

• The use of Grantor Retained Annuity Trusts (GRATs) in this historically low interest rate environment could prove to be very beneficial, and save substantial estate taxes.

• The use of Qualified Personal Residence Trusts (QPRTs) in this environment of declining residence values could prove to be very beneficial, and save substantial estate taxes.

• The Credit Shelter Trust terms may need to be revisited. If there is not an option for a disclaimer, the results may differ from your original intentions.

• Specific bequests of specifically named stocks or residences may need to be reviewed. If the bequeathed asset has substantially declined in value, you may have intended to bequeath that party more than it is currently worth.

• Charitable bequests may need to be reexamined in light of the possibility that your total assets have decreased. Perhaps you may not want to, or you may not have as much available to make charitable bequests as you had when your current documents were created.

• Consideration should be given to existing life insurance policies. If existing policies were intended to pay estate taxes, in light of reduced asset values and increasing estate tax exemptions, there may not be a need for this policy/ these policies. However, as things may change, careful thought should be given before cancellation of any policy.

• As values of assets have declined, this could present an opportunity to make gifts at no gift tax cost, by utilizing annual exclusions and lifetime exclusions. In addition, for transferring interests in businesses, the use of discounts could prove to be a tool in reducing gift taxes.

• Assets of a decedent may be valued at either the date of death or six months thereafter. In this environment of declining values, alternate valuation dates could prove to be effective in reducing estate taxes.

In these times when laws seem to be changing each week, we will continue to update you as significant and relevant developments occur in these and other important subjects. With changes in laws coming down the pike, we invite you to contact us to discuss your estate plan.