It seems likely the federal estate tax is here to stay now that the Democrats rule the White House and Congress. Couple this with the turbulent economy and an increased desire by families to preserve their wealth, and the need for advisors to "tune up" their clients' estate plans is clear.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate and generation skipping transfer tax exemptions went from $2 million to $3.5 million this year.  The highest federal estate and gift tax rates remains at 45%. However, on January 1, 2010, the federal estate tax will be "repealed."  Exactly a year later, the federal estate tax rate is scheduled to revert back to prior law and return to a confiscatory 55% with a $1 million exemption (the generation skipping transfer tax exemption becomes $1.12 million, subject to further inflation adjustment). 

President Obama and the Democratic majority in Congress agree that new federal legislation is required. Obama recently proposed freezing the federal estate tax exemption at $3.5 million, with a top estate tax rate of 45%.

While the law remains in flux, it is a particularly advantageous time for planning wealth transfers. Individuals who have been waiting on the sidelines should take action to ensure their estate plans are in order. Determine the disposition of the assets in light of current goals and objectives and in light of life events and recent changes to wealth. Determine where assets are distributed based on your current balance sheet and asset ownership.  Assess potential estate tax liability and how that might be funded. Further, evaluate whether the planned disposition is tax-efficient and incorporates current law. Clearly, if the current plan does not represent your objectives, make appropriate revisions and be mindful to make any necessary changes.

Remember, estate planning is not exclusive to taxable estates above the $3.5 million threshold.  There is a universal need that varies based on goals, age, wealth, health and many other factors. A well thought-out plan should protect, preserve and ensure the distribution of assets.  Planning for incapacity and the appropriate care for one's self and assets, should such situations arise, is also incredibly important.  For this reason, powers of attorney for property and health care, as well as health care directives and living wills, should be reviewed. 

Take note of any increases to exemption amounts since your estate plan was last updated. With the increase to the estate and generation skipping transfer tax (GST) exemption, it is particularly important to review your plan in light of two items: retirement assets and state estate tax.

For individuals whose balance sheet consists predominantly of retirement assets, it is important to ensure that these assets aren't allocated to the estate tax exemption and incurring income tax unnecessarily.  The many recent developments with retirement plan asset tax rules should not be overlooked.

For clients who live in one of the many states that assess a separate estate tax, it is important to consider that state's exemption.  Many states have exemptions that are lower than the federal amount. An estate that is not taxable for federal purposes could be still subject to a state estate tax.  Domicile planning, as part of the estate plan, is important. 
Don't neglect the benefits of wealth transfer "gifts" from the IRS. These include the annual exclusion amount of $13,000 a year per individual, including the front-loading of 529 plans with five years of the annual exclusion.  Also, each person may give $1 million during their life without incurring a gift tax.  Finally, gifts for the direct payment of medical and education expenses do not count against annual exclusion gifts. Taking advantage of these freebies avoids the gift tax and may significantly reduce one's taxable estate over time.

Market Losses Offer Opportunity
Deep market declines offer a tremendous estate planning opportunity. Several strategies incur little or no gift tax that, with a market recovery, can successfully transfer wealth to heirs.  Strategies such as grantor retained annuity trusts (GRATs), charitable lead annuity trusts (CLATs), intrafamily loans, installment sales to intentionally defective grantor trusts (IDGTs) and statutory freeze strategies transfer to heirs the appreciation on these temporarily depressed asset values above a statutory interest rate-often referred to as the "hurdle rate."  In most cases, so long as you outlive the term established, the appreciation is removed from your estate.  With asset values and interest rates at historic lows, conditions favor implementing one or more of these strategies.

A GRAT allows taxpayers to transfer future appreciation to beneficiaries.  The GRAT returns an annual annuity for a term of years, designed so that the present value of those payments, calculated using the hurdle rate, equals the initial funding amount.  The current rates applicable for 2009 are at historically lowest levels.

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