For the first time in almost 100 years, a federal estate tax does not exist. On January 1, the federal estate and generation skipping transfer taxes were eliminated, but only for one year. Click here to read about the current legislative uncertainty.
To the surprise of most estate planning practitioners, the arrival of January 1, 2010 brought with it a federal estate tax repeal. Congress was unable to compromise prior to year end on legislation that would have either maintained the status quo ($3.5 million applicable exclusion amount and a 45% estate tax rate) or implemented new exclusion amounts and/or tax rates.
As a result, the following rules apply in 2010:
The prevailing belief among estate planners is that Congress will act soon to re-institute the estate tax and make it retroactive to January 1, 2010. If Congress fails to act in 2010, the federal estate tax will be reinstated by law on January 1, 2011 with a $1 million applicable exclusion amount and a $1.2 million GST exclusion.
This is a brief summary of the major estate tax changes as a result of the repeal. We will be blogging frequently on this topic as developments unfold. Please also look for a letter we are mailing out to our clients and friends explaining some of our concerns regarding the repeal, a copy of which will be posted to the blog shortly.
Repeal of the federal estate tax in 2010 – once unthinkable – now appears likely. While the House of Representatives passed a permanent extension of the estate tax in early December, the Senate has been unable to pass a temporary or permanent extension, or anything else related to the estate tax, as Congress rushes toward its holiday recess. It now appears likely that nothing will be passed prior to the end of the year and we will begin 2010 with no federal estate tax.
Congressional leaders have stated that they will resume efforts to pass legislation as soon as Congress returns, so repeal, if it happens, may be short-lived. Some Republicans have stated that they feel they will have better leverage to negotiate if the estate tax is actually repealed. Democrats have stated they would hope to restore the current tax and make it retroactive to January 1.
On December 3, the House of Representatives by a vote of 225 to 200 passed an estate tax bill which makes the $3.5 million applicable exclusion amount and the 45% estate tax rate permanent. Every Republican, along with 26 Democrats, voted no on the bill. If a law is not passed by December 31, the estate tax will be repealed for one year, and in 2011, the estate tax will return with a $1 million exemption (subject to inflation) and a top estate tax rate of 55%. The Senate is not expected to adopt this bill; it is more likely to pass a one year extension of the current law. We will keep you posted on all developments as they unfold.
Although Congress has been focused on health care and two wars, virtually everyone agrees that there will be estate tax legislation in the final 30 days of 2009, and the repeal scheduled for January 1, 2010, is not going to happen.
House Majority Leader Steny Hoyer is expected to bring a bill to the floor this week that would make permanent the 2009 estate tax levels ($3.5 million exemption, 45% rate), though a one-year patch also remains a possibility. This bill does not include other features like reunification, portability and indexing for inflation, due to concerns that these features increase the “cost” of the bill and make it less likely to pass given the limited time for consideration.
The Senate will take up the legislation toward the middle of December. Several lobbying groups feel that there is greater support in the Senate for reunification, portability and indexing.
If some or all of these features are included in the Senate bill, but not the House bill, they will get resolved in conference. Lobbying groups predict it will be down to the wire, with any agreement occurring between December 23 and December 30.
As of January 1, 2010, new rules take effect, permitting taxpayers to convert their traditional IRAs to Roth IRAs without any income limitations. Click here for an overview of Roth IRAs and a summary of the new conversion rules.
The IRS has released the AFR interest rate for October, reducing the September AFR rate from 3.4% to 3.2%. While this is above the historically low 2% AFR rate in February, it still represents a very low interest rate, making GRATs a very attractive estate planning device to transfer significant wealth to your family members gift and estate tax free. In this environment where there are some proposals in Congress designed to curtail the use of GRATs, it again highlights that now is the time to seriously consider implementing a GRAT if you have a large taxable estate.
New York’s new Power of Attorney statute becomes effective on September 1, 2009. The major changes are as follows:
New Statutory Short Form. The statute prescribes a new Statutory Short Form Power of Attorney. A major change is that the agent must now sign the form (before a notary) in addition to the principal.
Statutory Major Gifts Rider. The gifting provision in the Statutory Short Form only permits gifts up to $500. If a principal wants to authorize the agent to make larger gifts – i.e., virtually every case – the principal must execute a “Statutory Major Gifts Rider” or a non-statutory form POA.
The Statutory Major Gifts Rider (“SMGR”) has three substantive sections. Section (a) grants the agent limited authority to make annual exclusion gifts to the principal’s spouse, children, descendants and parents. Section (b) allows modifications where broader powers may be inserted. Section (c) allows the agent to make gifts to himself or herself.
The SMGR must be acknowledged and witnessed by two witnesses in the same manner as the execution of a Will. Generally, this requires two witnesses and a notary.
Appointment of a Monitor. In the new form there is an optional provision that the principal can appoint a “monitor” to request and receive records of transactions by the agent. The statute provides for a special proceeding that a monitor can bring to compel an agent to produce a record of receipts and disbursements and for other purposes. This provision should help reduce abuse of the power of attorney by the agent.
Compensation. The new form gives the principal the option to initial a box if he or she wants to provide reasonable compensation to the agent.
Not retroactive. The new law is not retroactive. Powers of Attorney properly executed in accordance with the law in effect at the time of its execution remain valid.
If you have any questions about the new law, please contact us.
The IRS has issued the Applicable Federal Rate (“AFR”) for September, keeping the AFR rate under Code §7520 unchanged from August at 3.4%. What this means is that GRATs are still very attractive estate planning devices for taxpayers. The AFR rate is the interest rate the IRS requires taxpayers to apply to the amount gifted to the GRAT to value the gift at zero. If the gifted assets appreciate at an amount greater than 3.4%, then notwithstanding any valuation discounts attributable to the gifted assets, the appreciation in excess of 3.4% would pass gift tax-free to the GRAT’s beneficiaries. Thus, the lower the AFR rate, the more attractive GRATs are to taxpayers.
In light of proposed legislation in Congress requiring only long term GRATs and limiting valuation discounts, now may be the time to implement a GRAT.
On June 30, Governor Corzine signed into law the 2010 state budget bill. Included in the bill are increases in the personal income tax rates for New Jersey taxpayers for one year, retroactive to January 1, 2009.
For taxpayers with taxable income in excess of $400,000 but less than $500,000, the tax rate increases from 6.37% to 8%, for taxpayers with taxable income between $500,000 and $1 million, the tax rate increases from 8.97% to 10.25%, and for taxpayers with taxable income in excess of $1 million, the tax rate increases from 8.97% to 10.75%.
A New Jersey taxpayer with taxable income of $1.1 million in 2009 now will pay New Jersey income tax equal to $95,480. Prior to the change in the rates, the same taxpayer would have paid $81,627.50. In this example, the percentage change in the tax rate is equal to 1.26%.
Earlier this year, New York also raised its income tax rates effective through December 31, 2011. For taxpayers with taxable income in excess of $300,000 but less than $500,000, the tax rate increases from 6.85% to 7.85% and for taxpayers with taxable income in excess of $500,000, the tax rate increases from 6.85% to 8.97%.
For those taxpayers who may have the ability to effectively change their domicile to other states with less of an income tax burden (i.e. Florida with no state income tax), now may be the time to seriously consider the move.
2009 has been an interesting year for estate planners. The arrival of 2009 brought an increase in the applicable exclusion amount to $3.5 million (from $2 million in 2008), meaning taxpayers with proper planning could shield this amount from the imposition of federal estate taxes. 2009 also brought the scheduled estate tax repeal for a one year period beginning on January 1, 2010 that much closer.
Notwithstanding the fact that we are now less than seven months away from a temporary estate tax repeal, there is a prevailing belief among estate planners that Congress will change the law before 2010 preserving some form of the estate tax, especially in light of the economic meltdown and the federal deficit.
In fact, numerous bills have already been introduced in Congress detailing estate tax parameters for 2010 and beyond. With respect to the applicable exclusion amount, three separate House bills have been introduced with exclusion amounts equal to $2 million, $3.5 million and $5 million, respectively.
For the most part, the estate tax rates in these bills are set at the current 45% estate tax rate, and some impose surtaxes on estates in excess of $10 to $25 million.
Other important items are addressed in these bills as well. For example, there is a mention of unifying the gift and estate exemptions, meaning if this were part of the new law (we believe unlikely at this point), the $1 million lifetime gift exclusion amount would be increased to equal the estate tax exclusion amount. This certainly would expand the ability of a taxpayer to implement more lifetime transfer planning.
Some of the bills include the concept of making the estate tax exclusion portable for couples, meaning for example if a husband does not utilize his full exclusion, his wife could utilize not only her exclusion, but his as well.
Finally, there is language in one bill which would restrict the use of valuation discounts typically applied to the ownership of closely held non-business family entities. These discounts are an integral part in transferring wealth to the next generation.
We will be keeping a close eye on estate tax legislation throughout the year and will report to you the new estate tax law as soon as it is passed.
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