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Estate Planning.

In preparing a personal estate plan, the following tools should always been considered:

1. Living Trust Agreements;

2. Pour-over Wills;

3. Durable Powers of Attorney for Health Care;

4. Durable Powers of Attorney for Property;

5. Irrevocable Life Insurance Trust (on the life of the primary income earner).

Estate Tax.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provides that federal estate, gift and generation skipping transfer (GST) taxes were to be progressively eliminated over a ten year period. Beginning in 2002, the estate tax was initially reduced until it is totally eliminated in 2010. However, if Congreass does not act to permanently eliminate the estate tax, the old rules, tax rates and exemptions would come back in 2011. The way things are at the moment, there is no estate taxes if death occurs in the year 2010, but if death occurs on or after January 1, 2011, under the sunset provisions of the act, the rates would revert back to the same as it was in the year 2002.

Congress Failed To Extend Estate Tax Reform

In 2009, Congress failed to extend the estate tax to 2010. Consequently, in 2010 there is no estate or generation-skipping tax. Moreover, if Congress again fails to act during 2010, the estate and gift taxes will reappear on January 1, 2011 – not as they were in 2009 – but as they existed in 2001. At that time, there will be a reduced exemption of $1 million, not $3.5 million as existed in 2009, and a top marginal rate of 55 percent, not 45 percent as existed in 2009. Although there will be continued uncertainty until Congress addresses the reinstatement of estate and generation-skipping taxes, existing plans should be reviewed to determine the effects of the repeal, and to consider planning opportunities.

Year	Top Estate Tax Rate	Exemption Amount
2002	50%	$1,000,000
2003	49%	$1,000,000
2004	48%	$1,500,000
2005	47%	$1,500,000
2006	46%	$2,000,000
2007	45%	$2,000,000
2008	45%	$2,000,000
2009	45%	$3,500,000
2010	repealed	all
2011	55%	$1,000,000

The above chart reflects the significant changes that occurred beginning in 2002 and continuing through 2011:

1. The amount that was exempt from estate tax and from gift tax increased from $675,000 to $1,000,000 in 2002 (which in 2009 increased to $3,500,000); and

2. The top gift, estate, and generation skipping tax rate was reduced from 55% to 50%.

In addition, the state death tax credit that offsets the federal estate tax will be reduced by 25% of the previously allowed amount, 50% in 2003, 75% in 2004, and repealed in 2005. The state death tax credit will be replaced with a deduction for state death taxes paid.

At the same time, starting in 2002, a "Unified Exemption" replaced the unified credit. Moreover, the generation-skipping transfer tax rate was pegged to the highest estate tax.

In 2002, the Unified Credit rose, effectively shielding $1,000,000 from estate taxes, and in 2009, Unified credit rose to $3,500,000.

The Unified Exemption effectively did the same thing, but in a different manner. In 2002, the first $1,000,000 in assets incurrred no estate taxes. After that, assets were taxed.

In terms of the Unified Credit, lawmakers are adhering to the classic "six eggs vs. half a dozen" concept. Both the Unified Credit and the Unified Exemption played the semantics game, essentially accomplishing the same purpose through different tax calculations.

One other interesting change that has a significant impact on estate planning is "stepped up basis." Under existing legislation there is no step up in basis for all inherited assets, and as a result new and complicated rules have come into place. EGTRRA provides a new basis for $1,300,000 of property inherited from the decedent, but no step down or step up beyond the $1.3 million.

The downside in 2010 is that the absence of an estate tax affects whether there is a stepped-up basis.

If you bought something in 1945 for $100, and now it’s worth $10 million, when you have stepped up basis, your estate pays a tax on the $10 million, but then your heirs receive that asset with a cost of $10 million. If they sell it the next day, they have no income tax to pay.” This year, when there is no estate tax, you don’t get that stepped-up basis.

So in 2010 when there is no estate tax, the heirs would take that asset with a basis of $100, not $10 million.

Step-Up Exemption in 2010

There is still a step-up exemption for the first $1.3 million — and a $3 million exemption for assets that are being inherited from a deceased spouse to a living spouse. After that, there is no step-up, meaning a $10 million sale now is subject to capital gains taxes.

The estate tax rates are higher than the income tax rates, so in theory that’s OK — you’d rather pay income tax rates, but it’s a complication.

Another complication: If someone dies with $5 million of assets, a fiduciary, or executor, allocates that $1.3 million step-up exemption as they see fit. If one heir feels others are benefiting at their expense, the executor could be sued.

And, of course, a lot of people don’t keep records back to when they acquired an asset. It Is a lot easier to know the value of something on the day the person died.

For 2001-2009, the new law preserves the rule that steps up (or down) basis in an asset transferred at death to its fair market value at the owner's date of death. For 2010, the one year in which the estate tax is repealed, the step-up in basis is eliminated, and assets transferred at death generally take a carryover basis (but not in excess of fair market value on the date of death). Personal Representatives (i.e., Executors) are given the authority to allocate $1.3 million worth of increased basis (plus additional basis to compensate for lost loss carryforwards and built-in losses) to certain assets passing from the decedent, and an additional $3 million worth of increased basis to assets transferred to a surviving spouse, subject to certain rules. Additional basis can only be added to certain assets passing from the decedent which were owned by the decedent at the time of death. In no event can the additional basis be allocated such that an asset has basis in excess of its fair market value. Like the other estate and gift provisions, these changes sunset in 2011; thus the current step-up in basis for all assets transferred at death is reinstated in 2011.

Gift Tax During 2010, when the estate and generation-skipping taxes are repealed, the gift tax continues in existence. The unified credit will continue to exempt lifetime transfers of up to $1,000,000. The top gift tax rate will be 35%. The annual exclusion (currently $13,000 per donee), as well as the exclusion for payment of medical and educational expenses, continues to apply, as do the deductions for charitable and marital gifts.

The unified credit against taxable gifts remains at $345,800 (exempting $1 million from tax) through 2009, while the unified credit against estate tax increases during the same period. The following table shows the unified credit and applicable exclusion amount for the calendar years in which a gift is made or a decedent dies after 2001.

	For Gift Tax Purposes:		For Estate Tax Purposes:
Year	Unified Credit	Applicable Exclusion Amount	Unified Credit	Applicable Exclusion Amount
2002 and 2003	345,800	1,000,000	345,800	1,000,000
2004 and 2005	345,800	1,000,000	555,800	1,500,000
2006, 2007, and 2008	345,800	1,000,000	780,800	2,000,000
2009	345,800	1,000,000	1,455,800	3,500,000

Gift Tax.

The gift tax applies to transfers by gift of property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule.

Generally, the following gifts are not taxable gifts:

Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,
Tuition or medical expenses you pay directly to a medical or educational institution for someone,
Gifts to your spouse,
Gifts to a political organization for its use, and
Gifts to charities.

Annual Exclusion. A separate annual exclusion applies to each person to whom you make a gift. The gift tax annual exclusion is subject to cost-of-living increases.

Gift Tax Annual Exclusion
1998- 2001	$10,000
2002 - 2005	$11,000
2006 - 2008	$12,000
2009	$13,000

For 2009, you generally can give a gift valued at up to $13,000 each, to any number of people, and none of the gifts will be taxable. If you are married, both you and your spouse can separately give up to $13,000 to the same person in 2009 without making a taxable gift. If one of you gives more than $13,000 to a person in 2009, fee splitting rules apply.

Gift Splitting. If you or your spouse makes a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.

In 2009, gift splitting allows married couples to give up to $26,000 to a person without making a taxable gift.

If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.

There are many aspects to an overall estate plan, which should properly be reviewed by an attorney and tax planner on an individual basis.

To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained herein, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of: (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any matters addressed herein.

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