July 23, 2009

Federal Estate and Gift Tax Changes

On January 1, the individual exemption for federal estate tax increased from $2 million to $3.5 million per person. With proper planning, a married couple may now shelter at least a combined $7 million in assets from federal estate tax. This change will affect many people and presents several issues.

Review Planning Documents for Outdated Formula Clauses

Most estate planning documents include formula clauses that allocate assets at death based upon the federal estate tax exemption amount available at the time of death. Therefore, a plan put in place prior to the recent increase in the federal estate tax exemption amount may no longer allocate assets in a manner consistent with your current planning objectives.

For example, under a typical plan put in place in 1997 for a client having a gross estate of $3.5 million, $600,000 would have been allocated to a tax sheltered trust for the benefit of the surviving spouse and children, and $2.9 million would have passed outright to the surviving spouse.

Under current law, the entire $3.5 million would be allocated to a tax sheltered trust for the benefit of the surviving spouse and children (potentially reduced by the payment of a substantial Minnesota estate tax, which is discussed below), and no assets would pass outright to the surviving spouse.

With this in mind, it would be wise to review current planning documents to ensure they reflect your planning objectives.

Minnesota Estate Tax Exemption Is Not Scheduled to Increase

Those with total net assets of $4 million to $7 million may no longer face a federal estate tax at death. Of course, there are several caveats—including some specific to Minnesota residents.

Minnesota still has a separate estate tax with an individual exemption of $1 million per person ($2 million for a married couple.) This exemption amount is not scheduled to increase. Thus, when the first spouse of a married couple dies, Minnesota residents with estates over $1 million may pay a substantial Minnesota estate tax, even if no federal estate tax is owed. With proper planning, however, it may be possible for Minnesota residents to defer paying some or all of the Minnesota estate tax until the death of the surviving spouse. If you have not addressed this issue in your current planning documents, you may wish to consider doing so.

Variety of Estate Tax Proposals Pending

Under current law, additional changes to the federal estate tax are scheduled to become effective on January 1, 2010, and January 1, 2011. These changes include, respectively, the complete repeal of the estate tax and reinstatement of the federal estate tax at the 2001 exemption of $1 million per person and a top marginal rate of 55 percent. Congress is currently considering several proposals that would modify the current law and may prevent these changes from taking effect.

Since the outcome of this proposed legislation is unknown, it is difficult to predict whether additional changes will be needed in 2010 and later. Monitoring developments in this area will be important over the course of the coming months to determine whether additional planning may be necessary in 2010 and beyond.

How Faegre & Benson Can Help

As a result of the increase in the federal estate tax exemption—combined with the decline in value of securities and real estate during the past year—many people may need to revisit their estate planning documents.

To discuss your particular situation with regard to any of these matters, please contact an attorney in the Faegre & Benson wealth management practice.

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