The federal estate tax exemption increased from $2 million to $3.5 million for 2009 but is scheduled to disappear in 2010 and reappear in 2011 with an exemption of only $1 million. Although Congress has not yet addressed this sunset provision, it likely will not materialize. The generation skipping tax (GST) exemption also increased from $2 million to $3.5 million for this year and with careful planning up to $7 million may be transferred by a married couple, free from GST tax, to (or in trust for the benefit of) grandchildren and great-grandchildren upon the surviving spouse’s death. Therefore, your estate plans should remain flexible and planning to avoid or minimize federal estate tax should be part of your overall financial game plan. The increased exemption amounts provide many planning opportunities including the use of credit-shelter trusts.  

Annual Exclusion Gifts

Gifting is a useful and common tool used to reduce a taxable estate. The annual gift tax exclusion increased from $12,000 to $13,000 per recipient for 2009 although the lifetime gift tax exemption amount remains at $1 million. Therefore, a married couple can gift up to $26,000 per donee free from gift tax consequences. In 2009, the combination of the annual gift tax exclusion and first-time home buyer credit could help your children or grandchildren buy their first home. If your child is married, you and your spouse could give the couple $52,000 ($26,000 each) under the gift tax exclusion. Assuming the couple could qualify for the $8,000 first-time home buyer credit, they would effectively have a $60,000 down payment for their home.

Planning Opportunities Involving Low Interest Rates

Interest rates are at an all-time low and many estate planning strategies utilize interest rates set by the federal government including intra-family loans and installment sales of assets, such as interests in a family business. Intra-family loans are beneficial when interest rates are low because the lent funds can be used to invest in assets with an expected yield higher than the loan rate or to pay down existing debt incurred at a higher rate. Consequently, consider gifts to grantor retained annuity trusts and charitable lead annuity trusts as they provide additional methods for taking advantage of the low interest rates to pass asset appreciation on to family members with little or no gift tax consequences.  

Planning Opportunities Reflecting Lower Asset Values

The current economic climate provides a favorable opportunity to gift assets to family members. Giving an asset away now, when its value is likely lower than it was last year, may make sense. If the asset recovers its value, it will do so in the hands of the recipient and avoid higher gift or estate tax. Therefore, the asset appreciation belongs to the recipient, along with any associated capital gains tax.