Estate Tax Exemption Amount Increased on January 1, 2009; Gift Tax Exemption Amount Remains Unchanged

1/13/2009 Articles

Federal estate tax and GST tax exemptions reach $3.5 million.

As many of you know, the federal estate tax exemption (or credit equivalent) increased on January 1, 2009 from $2 million per person to $3.5 million.  This is good news for estate tax purposes because it means each person may transfer at death up to $3.5 million of assets without the imposition of a federal estate tax.  In addition, the exemption from another federal transfer tax, referred to as the generation-skipping transfer tax (or "GST tax"), also increased as of January 1, 2009 from $2 million to $3.5 million.

Federal gift tax exemption is unchanged at $1 million.

Of course, a person may use a portion of his or her federal estate tax exemption early by making lifetime gifts.  This is because a person may elect to make lifetime taxable gifts of up to $1 million, but to shield those gifts from federal gift tax with an offsetting $1 million exemption from federal gift tax.  The federal gift tax exemption of $1 million did not increase as of January 1, 2009.  If a person makes taxable lifetime gifts which are shielded from the federal gift tax by his or her $1 million gift tax exemption, then the gift tax exemption used to shield those lifetime gifts is essentially deducted from the available estate tax exemption at death. 

As an example, if a person makes taxable lifetime gifts to his children of $600,000 and shields those gifts from federal gift tax by using a portion of the $1 million gift tax exemption, then upon his death, that person would only have $2.9 million of available federal estate tax exemption to apply to his estate, having already used up $600,000 of exemption early.

These tax rates are in effect for 2009 only.

In 2010, the federal estate tax, under current law, is set to expire, meaning there would be no federal estate tax imposed on an estate, regardless of its size.  Most practitioners in the estate tax arena are advising their clients not to count of the upcoming expiration of the federal estate tax.  It is likely that the new Congress will enact legislation this year to extend the federal estate tax into future years. 

What does this mean for you?

1. First, you will be able to transfer more assets at death free of federal estate tax. Keep in mind that some states also impose their own state inheritance or estate taxes. California, however, has no state inheritance or estate tax.

2. The ability to give away more at death without paying federal estate tax may make some of you more comfortable with the idea of making larger gifts during your lifetime. Even if you gave away the maximum $1 million free of federal gift tax during your lifetime, you would still have an available $2.5 million federal estate tax remaining to apply to your estate at death. Making gifts of appreciating assets, or assets that generate taxable income that you don't need, may be an excellent long-term strategy for your family. And now, when the value of your assets may be down, may just be an excellent time to make gifts with those assets.

3. If you have an estate plan where you make gifts at death that are measured by a formula, you may want to review those gifts with your estate tax attorney now. Many plans include gifts at death that are described with language such as: "I give to my grandchildren assets equal in value to my available federal estate tax exemption amount". If you had died in 2008, the amount that would pass to the grandchildren would be $2 million. If you die in 2009, the amount would increase to $3.5 million. Is that too much?

4. Likewise, many estate plans provide that when a parent dies, inherited assets are held for children in generation-skipping trusts, which are designed to hold assets that are exempt from the GST tax, often for the lifetimes of the children. Since the amount of the exemption from the GST tax also increased from $2 million to $3.5 million, the amounts passing into these trusts may be larger than expected. You may want to review your estate plans now to see if the changes in the GST exemption amount create the result you really desire for your family.

Gifts to Charity

Last (and changing subjects), we've heard from many of our clients that they wish to help those in need even more during these hard financial times.  Gifts to charity can be a very effective and wonderful part of an estate plan.  There are a myriad of ways to give.  Let us know if you'd like to explore charitable giving as part of your plan.

This email is not meant to be an exhaustive discussion of the federal estate and gift tax laws, or how those laws may apply to you, your family, or your estate plan.  If you would like further information or wish to review your estate plan, please contact your Family Wealth attorney at Farella Braun + Martel LLP.

Farella Braun + Martel Family Wealth Group:

George Argyris / 415-954-4992 / [email protected]
Fred Caspersen / 415-954-4427 / [email protected]    
Lara Gilman / 415-954-4913 / [email protected]         
Barbara Murphy / 415-954-4933 / [email protected]
Kate Ohlandt / 707-967-4156 / [email protected]    
Mike Korbholz / 415-954-4956 / [email protected]    
Jon Hill / 415-954-4993 / [email protected]
Genevieve Larson / 415-954-4931 / [email protected]
Kristine Waggener / 415-954-4972 / [email protected]