Federal Estate and Gift Tax Update: 2009 – 2011

The federal estate tax exemption amount increased from $2 million per person in 2008 to $3.5 million per person on Jan. 1, 2009. The Economic Growth and Tax Relief Reconciliation Act of 2001 also included the repeal of federal estate tax for people dying in calendar year 2010. However, such repeal is temporary and applies only in 2010. The effective federal estate tax rate and federal estate tax exemption amounts currently on the books are as follows:

There is widespread anticipation that Congress and President Obama's administration will promptly address the federal estate tax issue to avoid the result shown in the table above for 2010 and 2011. During the election campaign, then Senator Obama suggested that he would be in favor of essentially freezing the exemption at $3.5 million for 2010 and years thereafter, and retaining the current 45 percent rate on the excess. One bill has already been introduced in the House of Representatives along these lines.

Since May 2005, the state of Washington has had a stand-alone state estate tax on assets in excess of $2 million. The stated rates for the Washington estate tax range from 10 to 19 percent; the highest effective rate is typically between 10 and 12 percent, due to the deductibility of the Washington tax in the computation of the federal tax. We do not anticipate a change in the Washington exemption amount.

On Jan. 1, 2009, the annual exclusion for federal gift tax purposes increased from $12,000 to $13,000 per donor/per donee. The federal lifetime gift tax exemption (for gifts in excess of the annual exclusion) has not changed; it remains at $1 million.

It is important to recognize that both estate planning opportunities and pitfalls result from (i) the new difference in the federal and state estate tax exemptions and (ii) the federal estate tax exemption amount beginning on Jan. 1, 2009.

Planning pitfalls and opportunities

1. Have you inadvertently disadvantaged your spouse?
   
   Your plan may need immediate revision if you are married and your estate plan leaves assets equal to your federal exemption amount to someone other than your spouse, because the substantial ($1.5 million) increase in the federal estate tax exemption would substantially reduce the assets available to your spouse on your death.
   
   
2. Could your current plan result in tax payment required when you die?
   
   If you are married and your estate plan leaves assets equal to the full federal exemption in trust for your spouse, your plan may need revision in order to avoid payment of Washington estate tax when you die. For example, if your estate is $3.5 million and would pass in trust for your spouse, $170,000 in Washington estate tax could be payable within nine months following your death. This tax can be deferred with proper drafting.
   
   
3. Valuation discounts
   
   Estate planning for many clients has included gifts of interests in family LLCs and partnerships to take advantage of valuation discounts.
   
   A bill already introduced in the House of Representatives could substantially curtail the use of this planning technique (and it could also limit the ability to claim valuation discounts for estate tax purposes). This bill, if passed, would curtail these valuation discounts for gifts made after the enactment of the bill, so there is a current incentive to complete any such gift planning as soon as possible.
   
   
4. Gifting opportunities

   Gifting now may be especially advantageous, in light of the significantly depressed value of many classes of assets.

If you wish to discuss the application of these changes (and anticipated changes) as they apply to your estate plan, please notify your estate planner.