Law Office Report - Summer 2009
Estate Planning Tuneup May Be Needed Given
Financial Downturn and Uncertain Estate Tax Rules
It is time to review your estate plan in light of the financial downturn and uncertainty relating to future changes in the estate tax law. The financial crisis has affected everyone’s investments to some extent, resulting in most people’s estates declining in value. The change in the value of your estate, together with recent changes in the estate tax law and uncertainty relating to future law changes, makes it critical that you have your estate planning documents reviewed to ensure that you minimize or eliminate estate taxes and preserve as much of your estate as possible for your family members.
Under current law, up to a $3.5 million estate is exempt from taxes in 2009, there is no estate tax in 2010, and in 2011 the prior law will be reinstated, and the amount exempt from taxes will be $1 million. Further, in 2009, the estate tax rate is 45%, and as described above, the estate tax will be eliminated in 2010, and in 2011 when the prior law is reinstated the rate will be 55%.
President Obama’s administration and many in Congress desire to eliminate the uncertainty relating to the future of estate tax rules by making the estate tax permanent. Most tax experts believe the exemption will be kept at $3.5 million, and the rate will stay at 45%. In addition, the President and Congress are considering indexing the exemption amount to inflation and making the exemption “portable” for spouses. Making the exemption portable means that at your death, all of your assets and exemption may be transferred to your spouse. At your spouse’s death, he or she could then exempt up to $7 million from estate taxes.
You need to update your financial statements to determine the size of your estate. In the past 12 years or so, the exemption amount has risen from $600,000 to $3.5 million. Many people needed complex estate planning documents when the exemption was at lower amounts to minimize or eliminate estate taxes. As an example, a husband and wife may have set up a joint revocable trust which contained funding mechanisms to set up a family or credit shelter trust at the time of the first death. Using this estate planning technique, each spouse could exempt up to the maximum amount of the estate tax exemption. Depending upon the size of your estate, creation of the family or credit shelter trust may not be necessary given the increase that occurred in the exemption amount. Of course, there are other estate planning reasons why the family or credit shelter trust may be a useful technique.
Congress is also considering changing the law affecting another estate planning technique – the use of family limited partnerships. You can put assets, such as your business and possibly real estate and other investments, into a family limited partnership or limited liability company (“LLC”) and then give away shares in the partnership or LLC to your family members. Because these shares cannot be transferred to non-family members, the price is discounted because of lack of marketability. This technique allows you to give away a greater amount of your assets in a shorter amount of time, thereby minimizing or eliminating estate taxes. Congress is considering ending this marketability discount.
The bottom line is that changes in the law and changes in your financial condition result in the need for you to review your estate planning. Given the uncertain times we are in, it is important to make sure your estate plan accomplishes the goals you intended it to accomplish.