Sen. Baucus Moves to Make 2009 Estate Tax Levels Permanent

Posted on March 30, 2009 by Karen Meckstroth

Senate Finance Chair Max Baucus (D-MT) has introduced a bill to make the 2009 federal estate tax levels permanent, to unify the estate tax and gift tax, and to allow transfer of a deceased spouse's unused unified credit to the surviving spouse.  The bill -- the “Taxpayer Certainty and Relief Act of 2009”(pdf) -- deals with numerous other tax issues as well, including individual tax rates, the child tax credit, marriage penalty relief, and the alternative minimum tax. 

Under current law, in 2009, the federal estate tax exemption is $3.5 million, the lifetime gift tax exemption is $1 million, and the top federal estate and gift tax rate is 45%.  The federal estate tax is set to be "repealed" for one year in 2010 and will return in 2011 with a $1 million federal estate tax exemption and a 55% top tax rate.  Current law makes no provision for "portability" of a deceased spouse's unused exemption.  In other words, if Fred dies with a taxable estate that is less than his federal estate tax exemption, Fred's excess exemption amount is lost and Wilma can't use it.

What the Bill says:

  • Section 301 of the Bill unifies the estate tax and the gift tax.  In other words, the federal estate tax exemption and the gift tax exemption would be the same.  Instead of a $3.5 million estate tax exemption and a $1 million gift tax exemption, both the estate tax and the gift tax exemptions would be $3.5 million. 
  • Section 301 of the Bill sets the federal estate tax exemption at $3.5 million, adjusted for inflation, and sets the top tax rate at 45%.
  • Section 302 of the Bill creates portability of the deceased spouse's unused exemption.

Attorney Juan C. Alvarez discusses portability under the Bill in his Florida Probate & Trust Litigation Blog.  Attorney Greg Herman-Giddes also discusses the ramifications of portability in his North Carolina Estate Planning Blog.

Portability is not automatic.  The Bill requires the executor of the deceased spouse's estate to make an election on a timely filed federal estate tax return.  If Fred's taxable estate is $2 million and his executor makes a timely election, then, under the Bill, Wilma's exemption for estate and gift tax purposes is her $3.5 million plus Fred's unused $1.5 million.  At a tax rate of 45%, the portability of Fred's unused exemption allows Wilma to pass an additional $675,000 free of federal estate or gift tax.

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Who Needs an Estate Plan?

Posted on March 20, 2009 by Karen Meckstroth

Estate planning makes sense no matter what size your estate is.  Of course, if your estate is large enough to be subject to estate tax on your death, one part of the planning process will be looking at different ways to reduce or postpone estate tax.  But whether your estate is large or small, planning makes sense.  Estate planning lets you to decide who will manage your assets, take care of your personal affairs, and make health care decisions for you if you become incapacitated in the future.  

If you are a parent, an important part of the planning process is choosing who will take care of your children if you die.  

Estate planning lets you control who will receive your property on your death and how they will receive the property.  If you die without a will or trust, California's intestacy laws control who inherits your property.  Without a plan, property passing to minor children goes to them outright when they turn 18.  With an estate plan, you can make sure your property is held in trust for the benefit of the child until a particular age or even for the child's lifetime.  

For most clients, the fundamental building block of their estate plan is the revocable living trust.  A revocable living trust avoids probate on your death because the assets held in the trust can be "administered" without a formal probate.  

The State Bar of California has published a pamphlet about the planning process called "Do I Need Estate Planning?"  It is a helpful resource if you are wondering whether now is the time to get your own estate plan started.

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A Clue to President Obama's Estate Tax Proposal

Posted on March 16, 2009 by Karen Meckstroth

The estate tax is back in the news.

First, let's review the current law:  If someone dies in 2009, there is a federal estate tax on the portion of the individual's taxable estate that is above $3.5 million.  (The exemption is adjusted if the individual made taxable gifts during his or her lifetime.)  The top rate for the federal estate tax in 2009 is 45%.  In other words, an individual who dies in 2009 can pass $3.5 million free of federal estate tax.  If both husband and wife die in 2009, the couple can pass $7 million free of federal estate tax (depending on the structure of their estate plan).  The federal estate tax is scheduled to disappear for one year in 2010 only to return in 2011 at a $1 million federal estate tax exemption and a 55% top estate tax rate.  

For the past couple of years, you would have been hard pressed to find someone who actually thought that Congress would stand by and let the 2010 repeal happen.  But what the new federal estate tax laws would look like has been anybody's guess.

President Obama has said that his administration will propose new federal estate tax laws this year, but what will they look like?  A clue appears near the end of the President's new budget.  If you take a look at footnote 1 on page 121 near the end of the budget (pdf), you will see that it is based on the assumption that "the estate tax is maintained at its 2009 parameters."  The details of the Obama administration's estate tax proposal are not yet known, but the footnote indicates that the President will propose making the 2009 laws permanent, with a $3.5 million exemption and a 45% top estate tax rate.  

Of course, there other aspects of the estate tax that Congress will need to hammer out in addition to the exemption amount and the tax rate -- for example, will a surviving spouse be allowed to use the deceased spouse's unused federal estate tax exemption?  Congress may also turn its attention to other tax issues relating to the transfer of assets -- will the lifetime gift tax exemption remain at $1 million?  will zeroed out GRATs survive?  what about QPRTs?  will Congress limit the number of generations that assets can pass free of tax in perpetual trusts?  Stay tuned! 

 

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