Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

One of the most basic reasons to have a Will is to name an executor.  The executor gathers and manages assets, administers the estate, pays bills, pays taxes, and ultimately distributes the estate assets to the decedent’s beneficiaries.  The “paying taxes” part of the job can be difficult.  People don’t like to pay taxes.  Also, if there are substantial non-probate assets, or different beneficiaries sharing disproportionately in the estate, the allocation of taxes among the beneficiaries can be a very significant issue.  The executor also is responsible for dealing with tax authorities, not always a desirable job.

These types of issues came to a head in the recent Tax Court case of Gudie v Comm’r.  Decedent, a California resident, held her assets in a living trust (ie, non-probate asset) with her two nieces as successor co-trustees.  During her lifetime, decedent entered into an unusual private annuity transaction, selling her assets to her nieces in exchange for their promise to pay her an annuity.  Although no payments related to the transaction ever were made, decedent’s estate tax return reported that the decedent’s $8 million liability from the private annuity transaction exceeded the decedent’s $7 million in assets, so no estate tax was due.  Perhaps not surprisingly, the IRS challenged this position, and sent a deficiency notice to one of the nieces.

The niece raised the “wrong taxpayer” defense, arguing that, even though she had signed the estate tax return, she was only a co-trustee and had never been formally appointed as the executor of the decedent’s probate estate, so she was not the proper party to be notified of the deficiency.  Again unsurprisingly, the Tax Court rejected this argument, and denied the niece’s motion to dismiss the case.  The court found that the niece was a “statutory executor” under the tax rules and was the proper person to receive the deficiency notice. 

This case highlights some of the risks faced by fiduciaries of trusts or estates.  The successor trustee in this case attempted a weak argument to try to avoid the alleged tax deficiency, and lost.  The estate administration process is often complicated and needs to be attended to carefully.

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On June 28, 2011, the Senate introduced Senate Bill 1286 (known as the Trade Adjustment Assistance Extension Act of 2011), which contains the same GRAT restrictions that were introduced in numerous bills in the House of Representatives and Senate in 2010.  The comprehensive 2010 tax act enacted in December 2010 did not include any GRAT restrictions.  Thus, in 2011, the use of GRATs has not been curtailed or restricted.

The new Senate bill provides that (i) GRATs must have a minimum 10 year term and (ii) the remainder interest of the beneficiaries of a GRAT at the time of the transfer must have a value greater than zero.  If enacted, the bill would prohibit “zeroed-out GRATs,” that is, GRATs where the full value of the assets contributed by the Grantor will be paid back to the Grantor in the form of an annuity so that the remainder interest will have a value of zero.  No guidance has been offered to provide what the minimum value of the remainder interest must be.  One other restriction of note:  the annuity payment itself cannot be reduced year-to-year during the 10 year term.  Without this restriction, it may have been possible to create the economic equivalent of a short term GRAT.

For those people who are interested in short term GRATs, now may be the time to accelerate the implementation of them if you believe the GRAT restrictions will become law.

It is unclear what the effective date of Senate Bill 1286 would be.  The bill provides that amendments made under the section of the bill restricting GRATS would apply retroactively to transfers made after December 31, 2010 but the same GRAT restrictions set forth in the Administration’s 2012 revenue proposals provide that the proposal would apply to trusts created after the date of the enactment of the bill.

We will keep you apprised of the developments of this legislation.

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While recent New Jersey headlines have announced a new deal to save the troubled Xanadu project in the Meadowlands, the governor also has recently signed two pro-business tax bills that may be even more exciting for New Jersey business owners.

The first bill, S2753, affects businesses that allocate income to multiple states, and simplifies the New Jersey corporate business tax to a single sales factor formula.  New Jersey previously relied on a weighted average of three factors -- property, sales and payroll – which tended to penalize businesses with property and payroll in New Jersey but little in the way of New Jersey sales.  The new method of calculating New Jersey source income – based on New Jersey sales only – is phased in over three years, beginning in January 2012.

The second bill, S2754, will allow taxpayers to net gains and losses from certain business-related categories of New Jersey gross income and allow those losses to be carried forward for up to 20 years. 

New Jersey’s gross income tax system requires that taxpayers recognize income in several different categories, or baskets.  Under the current law, income or loss in one category may not offset income or loss in another category. 

Under the new law, if a taxpayer has income in the following categories:  (1) net profits from business, (2) net gains or net income derived from or in the form of rents, royalties, patents and copyrights, (3) distributive share of partnership income and (4) net pro rata share of S corporation income, then the gains and losses in those categories can be netted against each other.  Once the law is fully implemented, a taxpayer can deduct 50% of the savings that would accrue from unlimited netting between those income categories and from applying the net loss carryforward.  The bill phases in the tax savings 10% per year over five years, beginning in 2012. 

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On March 30, 2011, a few members of the House Ways and Means Committee (Kevin Brady, R-Texas, joined by Mike Ross, D-Arkansas, Kristi Noem, D-South Dakota, Dan Boren, D-Oklahoma and Devin Nunes, R-California) introduced legislation, HR1259, to repeal the estate and generation-skipping transfer tax, effective on date of enactment.  The legislation does not repeal the gift tax; it is maintained with a $5 million exemption and a 35% gift tax rate.  In lieu of estate and GST taxes, the legislation provides that there would be no step up in basis for assets at death and in its place, the carryover basis regime that was part of the 2010 estate tax repeal would be utilized.  It is not imminent that this legislation will be enacted, nor do we expect it to go far, but we nevertheless will keep an eye on it.

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When a target company participates in an ERISA-regulated multiemployer pension plan, the acquiring company generally faces a number of unique issues. The most important of these is that the acquirer is likely to take on any liability for the multiemployer plan’s underfunding, even if the transaction is structured as an asset purchase.

In Einhorn v. Ruberton Construction Co., decided on January 21, 2011, the Third Circuit Court of Appeals followed a number of other circuits and held that a company purchasing assets from another company may be liable for delinquent pension contributions to multiemployer pension or health funds. As a result, asset purchasers must consider ERISA liability when deciding whether or not to purchase another company’s assets.

The Third Circuit considered whether Ruberton Construction Company could be held liable under two collective bargaining agreements it had entered into with the union, as a successor employer to the original signatory to the agreements, Statewide Hi-Way Safety, Inc., who sold its assets to Ruberton for $1.6 million. In its decision, the Third Circuit considered the circumstances under which a purchaser of assets would bear liability under ERISA for delinquent employee benefit fund contributions. The Third Circuit held that successor liability could be appropriate where (1) the successor was on notice of the underfunding, (2) there was sufficient continuity of both workforce operations between the corporate entities, and (3) the predecessor could not provide adequate relief (and had ample time to insulate itself from liability through the negotiation process).

Of further concern to the Third Circuit was the policy goal underlying ERISA to protect both plan participants and their beneficiaries. The Court reasoned that if successor liability were not imposed, other employers would have to make up the difference so that beneficiaries could receive their health care benefits, which would be contrary to the Congressional policy underlying multiemployer pension funds, thus making it appropriate to expand successor liability. However, such a determination should be made on a case-by-case basis.

The decision will have a significant impact on the future structure of asset purchases, and buyers will now need to consider how to protect themselves when negotiating with a company that has a multiemployer plan.

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One component of the 2010 Tax Act enacted on December 17th that did not receive widespread attention was the extension of the direct IRA charitable rollover rules for 2010 and 2011. This provision permits taxpayers 70 ½ and older to donate up to $100,000 directly from their IRAs to public charities without having to account for the distributions as taxable income. Due to the late enactment in 2010, taxpayers are given until January 31, 2011 to make 2010 charitable contributions directly from their IRAs if they so desire. Taxpayers are not permitted to roll back their previously distributed 2010 distributions to their IRAs to take advantage of this provision, nor are taxpayers permitted to undo their 2010 distributions to charity. This provision was first enacted in 2006, but expired at the end of 2009. It is now extended until December 31, 2011.

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From 1986 until very recently, a C corporation that converted to an S corporation faced potential double taxation on built-in gain assets (“BIG assets”) for a 10 year period following its S election. The full benefit of electing S corporation status and pass-through taxation was only available after the 10 year period.

In 2009, legislation was enacted reducing the built-in gain period to seven years for BIG assets sold in 2009 and 2010. In the recently-enacted Small Business Jobs Act of 2010, this period was reduced to five years for BIG assets sold in 2011.

This generally means that if a corporation’s S election was on January 1, 2006 or earlier, there will be no corporate level tax on BIG assets sold in 2011.

Unless it is extended, this provision only is valid for this year and the law will revert to the 10 year built-in gains period at the end of 2011. Owners of S corporations with significant built-in gains should consider the tax benefits of selling BIG assets during this time frame.
 

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The following letter was recently distributed to clients and friends of Cole Schotz:

Dear Clients and Friends:

On December 17, 2010, President Obama signed into law sweeping new tax legislation that makes significant changes to estate, gift and generation-skipping transfer (“GST”) taxes. Not only may the new law have a dramatic impact on your existing estate plan, which we now strongly encourage you to review, it may also provide an excellent opportunity to implement additional planning that could benefit several generations of descendants.

In this regard, it is important to note that the new law is temporary – the favorable tax provisions sunset at the end of 2012, at which time Congress will either pass new legislation or allow the provisions of the 2001 tax law to take effect ($1 million exemption and a top estate and gift tax rate of 55%). Thus, it is critical for you to review your estate plan during this two year period to ensure you are maximizing your tax saving opportunities.

This letter contains a brief overview of the major changes to the federal estate, gift and GST tax system, all of which are effective January 1, 2011:

• The estate, gift and GST exemptions are $5 million per taxpayer and the tax rate is 35%. Prior to the suspension of estate and GST taxes in 2010, the estate and GST exemptions were capped at $3.5 million, the gift tax exemption was capped at $1 million and the top tax rate was 45%. The exemption amounts will be adjusted for inflation after 2011.
• The estate tax exemption for a deceased spouse is now “portable,” meaning the surviving spouse can use the unused estate tax exemption of the “last deceased spouse.” Thus, for example, if the first deceased spouse’s exemption is left fully intact, the surviving spouse will be able to transfer during his or her lifetime or at death $10 million gift and estate tax free. Use of the last deceased spouse’s exemption is not automatic – an election will need to be made on the last deceased spouse’s federal estate tax return. In addition, the deceased spouse’s GST exemption is not portable. What this all means is that portability planning is not simple, and proper thought and consideration needs to be given to this issue to ensure it is being handled correctly.
• The lifetime gift tax exemption increases from $1 million to $5 million (and $10 million per couple) so that the gift tax exemption is now unified with the estate tax exemption. This presents many planning opportunities for taxpayers to transfer significantly more wealth during their lifetimes without paying gift tax. For those taxpayers who have previously utilized their full $1 million lifetime gift exemptions, the new tax law permits an additional $4 million of lifetime gifting gift tax-free. The annual gift exclusion remains at $13,000 in 2011, or $26,000 per couple.
• There was concern that the new legislation would include restrictions on the use of (i) valuation discounts when transferring ownership interests in family entities as a part of a gift giving program and (ii) short term grantor retained annuity trusts (“GRATs”), a very effective technique to transfer assets without the imposition of gift tax. The new tax law does not contain either restriction. Thus, family entity planning, short term GRATs and sale transactions to trusts should be seriously considered, especially in light of the increased exemption amounts, and the current low valuation and interest rate environment.
• If, unfortunately, someone died in 2010, the new legislation has provided two different approaches to utilize in administering 2010 estates. The default rule is that the estate tax regime applies at a 35% rate and a $5 million estate tax exemption. The executor can opt out of the estate tax regime and instead choose the carryover basis regime, meaning there will be no federal estate tax but the decedent’s beneficiaries will not get a stepped-up basis in the assets inherited (subject to a limited right to increase the basis by $1.3 million for any beneficiaries and an additional $3.0 million for spouses).
• While significant changes were made to the federal transfer tax system, as discussed above, state estate taxes remain unchanged. Due to the greater disparity between the federal exemption amount ($5 million) and state exemption amounts (New Jersey –$675,000 and New York -$1 million), a larger (and potentially) unnecessary state estate would be triggered if your existing estate plan maximizes the federal estate tax exemption. While the federal exemption is now portable, state exemptions are not, so it will be even more important for estate plans to provide flexibility to enable the appropriate decisions to be made to maximize tax savings. Finally, for those taxpayers who travel to Florida and can make it their home, the new law magnifies even further the importance of reviewing the possibility of changing one’s domicile from New Jersey or New York to Florida to avoid the imposition of state estate taxes.
• As mentioned above, the new tax is not permanent – it sunsets at the end of 2012. Due to the temporary nature of the new law, it may be prudent for taxpayers to take advantage of the additional $4 million of tax-free gifting that is available for the next two years. Not only will additional gifting take advantage of the larger lifetime gift exclusion amount, it will remove the future appreciation of the gifted asset out of the taxpayer’s estate and potentially shift income to beneficiaries in lower income tax brackets.

We strongly recommend that you contact a member of our Tax, Trusts and Estate Department to review the effect of this change in law on your estate plan, whether or not we drafted your estate planning documents. Together, we can determine what steps, if any, need to be taken to achieve your estate planning objectives and to maximize the amount of wealth that will pass to younger generations. A list of the members of this department is attached to this letter.

Best wishes for a happy and healthy New Year.

Very truly yours,

COLE, SCHOTZ, MEISEL, FORMAN & LEONARD, P.A.
TAX, TRUSTS & ESTATES DEPARTMENT
 

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There has been a flurry of activity in the estate tax arena in the past few days and we wanted to keep readers updated. The first item was Senator Baucus’s (D-Montana) new estate tax proposal introduced on December 2, which, in summary, would have reinstated the estate tax at 2009 levels, meaning a $3.5 million exemption amount ($7 million per couple) and a 45% estate tax rate. This piece of his proposed legislation provided for an effective date of January 1, 2010, but would have allowed 2010 estates to elect to choose the no estate tax and modified carry-over basis regime that is currently in place for 2010. Other interesting items from Senator Baucus’s proposal included the lifetime gift exemption increasing to $3.5 million (effective on the date of the introduction of his bill, or December 2, 2010) and a minimum 10 year term for GRATs, with the GRAT remainder interest required to have a value greater than zero (effective on the date of enactment of the legislation). This legislation was voted down in the Senate on December 4.

Senator Baucus’s proposal was overshadowed on Monday by President Obama announcing his compromise with Republicans on the extension of the Bush tax cuts. Along with an agreement to keep the top income tax rate at 35% for all taxpayers for an additional two years, with regard to the estate tax, President Obama announced for two years, beginning in 2011, the estate tax rate would be 35% and the exemption per taxpayer would be $5 million.

Yesterday, House Democrats voted not to introduce President Obama’s tax plan for debate, in a move to negotiate some of the components of his plan. Thus, at this time, it is unclear what the components of new tax legislation (if any) will be. If no law is enacted, beginning January 1, 2011, the estate tax rate would be 55% with a $1 million exemption per taxpayer.

We will keep you updated as developments occur.
 

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This week, the Senate considered the House’s version of the Small Business Jobs Tax Relief Act of 2010. Going into the hearings, there was considerable speculation that the Senate was going to pass its bill with the GRAT restrictions in place, meaning the minimum term for GRATs would be 10 years, and the remainder interests of any GRATs would have to have a value greater than zero.

The speculation was incorrect. The Senate’s version of the House Bill currently does not contain the GRAT restrictions, so for now, short term GRATs remain a viable technique. The House bill and the Senate version of the bill will ultimately have to reconciled. It is unclear whether the GRAT restrictions will be included. Thus, if you are planning to implement a short term GRAT, it is advisable to do it as soon as possible due to the uncertainty of the legislation.

We will continue to advise you on GRAT legislation as it happens.
 

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We wanted to continue to update you on new developments over the past few months in matters related to the estate tax.

• Despite reports stating that an estate tax deal was imminent, on May 18, Senate negotiators said that an agreement regarding estate taxes was on the verge of collapse after a majority of the Democratic caucus expressed concerns about voting for an expensive tax cut for wealthy families. Senate Finance Commissioner Max Baucus (D-Mont.) said “there is no agreement on the estate tax in either substance or process. None whatsoever.” Lobbyists said they believed the deal would have resulted in a top tax rate of 35 percent with a $5 million exemption level for individuals ($10 million for couples), with both figures indexed for inflation. They also believed it would have eliminated the chances of a retroactive estate tax increase.

• We previously wrote about bills being filed in both the Florida House and Senate in February, 2010 to impose a Florida estate tax on non-residents who own real or personal property in Florida and who reside in states that tax Florida residents who own property in those states. If enacted, the law would have been effective July 1, 2010. Both bills died in committee on April 30.

• In New York, an amended version of a bill was recently introduced to amend the estates, powers and trusts law to deal with certain formula clauses in Wills and trusts for estates of decedents dying in 2010. The amended bill provides, in essence, that for decedents dying in 2010, a formula clause in a dispositive instrument providing for a bequest of the maximum amount that can pass free of federal estate or GST taxes, shall be construed with respect to the law in effect for decedents dying on December 31, 2009. While we encourage all clients to review their planning documents in light of repeal, this bill could serve as a backstop for those clients who have documents drafted with formula clauses that are not applicable as a result of the estate tax repeal.

• A similar bill was introduced in the New Jersey Senate on May 20 to clarify the interpretation of certain formula clauses in Wills and trusts executed before 2010.
   

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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.

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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:

• There is no federal estate tax;
• There is no generation-skipping-transfer (“GST”) tax;
• While the gift tax exclusion amount remains fixed at $1 million, the gift tax rate drops to 35%; and
• The basis step-up for inherited assets is eliminated. In its place, beneficiaries will inherit assets with the basis of the decedent (assuming the asset has appreciated). There are two exceptions: (i) there will be a $1.3 million increase in basis to assets passing to beneficiaries on a decedent’s death and (ii) there will be an additional $3 million increase in the basis of assets passing to the decedent’s surviving spouse.

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.

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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.

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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.

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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.
 

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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.

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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.

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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.
 

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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.
 

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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.
 

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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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