|
Tax-Free Amount Increases to $3.5 Million for Estate Tax Purposes
Each taxpayer may transfer up to $2 million worth of property tax-free upon his or her death. In 2009, the maximum limit will increase to $3.5 million. With proper estate planning, a married couple may make combined transfers worth up to $7 million free of estate taxes. Unfortunately, taxpayers whose estate planning documents are not in order may waste this opportunity. So too might those married taxpayers whose estate planning documents are in order if assets worth at least $3.5 million are not titled in the name of each spouse. It is important to remember that the $3.5 million amount is reduced by any taxable gifts made during the taxpayer’s lifetime (other than annual exclusion gifts). Life insurance proceeds may also count against the $3.5 million amount unless additional estate planning techniques are used.
Contact for more information: Stephen A. Frost
Federal Estate Tax Repeal Continues to Make Planning Difficult
The federal estate tax as now constituted is scheduled to be repealed in 2010. If Congress does nothing, the repeal automatically sunsets and 2011 will see a return to the current system. However, the amount that can be transferred tax-free at death after the automatic repeal will only be $1 million per taxpayer. During the year in which it is repealed, the estate tax will be replaced by another tax, which will work much like a capital gains tax. It remains highly unlikely that a major tax system can be changed for only one year. It is also doubtful that the federal estate tax will be permanently repealed. Because the repeal of the estate tax remains uncertain and the possibility of a switch between tax systems remains a possibility, the current estate planning environment remains frustratingly uncertain. Some have argued for a political compromise that will leave the current estate tax in place but increase the amount that can be distributed tax-free to an amount in excess of $3.5 million per taxpayer. Should the repeal become permanent, or if a political compromise is reached, it will be important for taxpayers to have their estate plans reviewed. In the meantime, Hinshaw will be watching and waiting for Congress to act.
Contact for more information: Marcia L. Mueller
Estates Out of Balance
In order to take full advantage of estate tax savings available to married couples, it is important to have a certain amount of property held by each spouse. Such calculations are first made when the spouses initially establish their estate plans. They should also be reviewed and reconsidered annually during any period in which the tax-free transfer amounts under the federal estate tax are changing. Failure to do so may result in an otherwise avoidable assessment of federal and state estate taxes.
Contact for more information: Anthony J. Zeoli
Illinois Estate Tax Now De-Coupled From Federal Estate Tax
Until 2009, Illinois followed the federal rule and allowed up to $2 million of property to be transferred per taxpayer tax-free at death. Beginning in 2009, up to $3.5 million per taxpayer can be transferred tax-free for federal tax purposes. Illinois, however, will not be changing the limit for state estate tax purposes. As a result, if the taxable estate of either spouse in a married couple exceeds $2 million after 2008, Illinois will tax the excess even though no federal estate tax will be due until the taxable estate exceeds $3.5 million. Some Illinois estate tax may therefore be due upon the death of the first spouse to die. The only way to avoid this result is to increase the marital deduction in the estate of the first spouse and potentially overpay the federal estate tax when the second spouse dies. Because this issue remains in flux, it will be important for taxpayers to review their estate planning documents as the tax laws in this area change.
Contact for more information: James M. Lestikow
Florida Repeals Florida Estate Tax
Florida residents are no longer required to pay state estate tax upon their demise. As a result, persons considering the possibility of becoming a Florida resident should consider the additional advantage of avoiding state estate taxes. The Estate Planning attorneys in Hinshaw’s Fort Lauderdale office can answer detailed questions on how to become a Florida resident and to how to properly document the change of residency.
Contact for more information: Linda L. Snelling
Limit for Annual Exclusion for Gifts Increases to $13,000
“Annual exclusion” gifts are relatively small gifts which may be made tax-free to a donee. The annual exclusion limit for 2008 is $12,000 per donee. The annual exclusion limit for 2009 will increase to $13,000 per donee. Taxpayers should seriously consider making annual exclusion gifts if they have the resources to do so as these gifts need not be reported for gift or estate tax purposes and will pass tax-free to the donee. Notably, the $13,000 limit includes all gifts to the donee during the year, and special rules apply for gifts to trusts. If the donees are grandchildren or trusts for grandchildren, generation-skipping implications will also need to be considered. Also, because a donee will receive a carried over basis in any property received, income tax implications must be evaluated.
Contact for more information: Alissa F. Kohlhoff
Lifetime Exclusion for Taxable Gifts Remains at $1 Million Per Taxpayer
Taxpayers may make taxable gifts (i.e., gifts in excess of annual exclusion gifts) totaling up to $1 million throughout their lifetime. For married taxpayers, each spouse may make taxable gifts totaling $1 million in the aggregate during his or her lifetime. Although such gifts are not subject to gift tax, the taxpayer must still file gift tax returns. The key advantage of making large lifetime gifts is to avoid estate taxes on future appreciation and future income from the gifted assets. The key disadvantage is that such gifts reduce the amount that can be transferred tax-free at death. With proper planning, the value of property gifted may also be discounted, thus increasing the gift’s tax efficiency. This is particularly important when planning business transitions or real estate transfers, and in general estate tax planning matters. Notably, gifts to spouses are tax-free and may be made in unlimited amounts throughout the donor spouse’s lifetime. A donee (including a spouse) will receive a carried over basis in any property received. So, income tax implications will need to be evaluated before making a significant taxable gift. Large gifts require careful thought and thorough tax planning before they are made.
Contact for more information: James W. Keeling
Family Limited Partnerships Remain Under Attack
Taxpayers who are in control over, or who own a portion of a family limited partnership or LLC may need to have their estate tax situations reviewed as soon as possible. This is because the IRS has successfully challenged family limited partnerships, using two different approaches. First, taxpayers who have used such a partnership for their own benefit and have disregarded the express terms of the partnership agreement have routinely lost to the IRS. Second, any taxpayer in control over the partnership as a general partner may also be subject to attack by the IRS. As a result of the IRS’ success in these instances, many taxpayers have had to include the full value of partnership assets in their respective gross estates for estate tax purposes. The simplest way to avoid this situation is for the taxpayer to give up control and to give away or sell all of his or her partnership interests during his or her lifetime. For those taxpayers who find doing so unacceptable, some serious planning may be needed.
Contact for more information: Steven W. Cutler
IRA Rollover Rules Extended Beyond Spouses
All distributions from an individual retirement account (IRA) are subject to income taxes at ordinary rates. Historically, a spouse who received an IRA from a decedent was allowed to roll over the IRA into his or her own name and defer recognition of the income from the IRA until the money was later withdrawn. The rules regarding the timing of income recognition have been loosened over time, and this has led to another major development. Beginning in 2007, individuals other than spouses may also roll over IRA proceeds under some circumstances. This may allow such individuals to defer recognizing the income from a decedent’s IRA for a lengthy period of time. Taxpayers should therefore identify the beneficiaries of their respective IRAs and determine if the list needs to be updated. It is important to note that a taxpayer’s IRA will be included in his or her gross estate for estate tax purposes. A marital deduction is available should the taxpayer’s surviving spouse be named as the beneficiary of the decedent’s IRA. Taxpayers in a second marriage situation should note that a surviving spouse who rolls over the taxpayer’s IRA will name his or her own beneficiaries at that time. The children from the taxpayer’s first marriage are therefore not likely to be such beneficiaries.
Contact for more information: David K. Ranich
Exclusion on Sale of Principal Residence
A taxpayer may exclude up to $250,000 of gain from the sale of a home owned and used by him or her as a principal residence for at least two of the five years before the sale. Married taxpayers filing jointly may now exclude up to $500,000 of gain. However, a recent tax law change may limit the general rule for taxpayers whose principal residence was formerly used as a vacation home or rental property. The new law does not allow a taxpayer to exclude any gain attributable to the period that the property was not used as his or her principal residence. Assume that a taxpayer owned a vacation home for four years and that home later became the taxpayer’s principal residence for two years. Upon the sale of the property, the gain that was attributable to the period that the property was a vacation home will not be eligible for the gain exclusion. The allocation of gain is based upon the period of time that the taxpayer owned the relevant property, but did not use it as his or her principal residence. If the gain on the sale of the property is $600,000, then $400,000 would not be eligible for the gain exclusion rule. Rather, only $200,000 of gain could be excluded from income taxes in the year of the sale.
Contact for more information: Timothy J. Leake
Hinshaw’s Estate Planning Group attorneys are prepared to discuss any of the matters discussed in this newsletter with our readers. We can likewise assist with any and all other estate planning needs, such as updating documents to effectively address changes in family relationships, significant increases in assets, or changes in tax laws occurring after the initial execution of the documents.
This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship |