As of January 1, 2009, an estate valued up to $3,500,000 is exempt from federal estate tax. Current law provides that the federal estate tax will be repealed in 2010 and reinstated in 2011 with a $1,000,000 exemption and a higher tax rate. Most commentators believe that the new Congress will not permit the estate tax to be repealed in 2010. It is anticipated that Congress will act to amend the estate tax laws to continue the $3,500,000 per person exemption amount and to lock in a tax rate of 45%. This larger exemption amount may allow you to simplify your estate plan. Some of you may not need a trust for tax planning purposes, but a trust may be appropriate for reasons other than estate tax savings, such as avoiding probate, managing assets for spouses or children, and providing for those with special needs.
Another element of estate tax reform may be a simplified use of the federal estate tax exemptions by a husband and wife. It is possible that any unused exemption amount of the first spouse to die will increase the exemption amount available to the surviving spouse, although some commentators believe this provision is too expensive and will not be enacted. Even with this simplification, the use of a bypass trust will continue to be desirable for combined estates expected to be in excess of the exemption amount, in order to remove appreciation of the bypass trust from taxation at the death of the surviving spouse.
Also on January 1, 2009, the annual gift tax exclusion increased to $13,000 per person per donee, up from the previous $12,000. This means a married couple can give $26,000 per year to any donee, such as a child or grandchild, without any gift tax. With the recent downturn in the market, this may be a good time to give stocks at their decreased value. For example, if a married couple has a stock holding that was worth $50,000 and now is worth $25,000, they can give the entire holding as a gift to a child or grandchild. If it goes back to its previous high value, all of the appreciation will pass tax-free to the donee.
Lastly, the $3.5 million federal estate tax exemption may be larger than many people anticipated when they executed their current estate planning documents, and this could cause some problems. For example, if the surviving spouse is not the beneficiary of the bypass trust, or if assets equal to the exclusion amount are to pass directly to children and not to the surviving spouse, then amounts available for the surviving spouse may be substantially less than planned. Thus, your current plan should be carefully reviewed if this undesired result is a possibility under the division of assets now being used in your estate planning documents.