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Federal Estate Tax Exemption... Going Up!

At long last, we’re approaching the final step of a long climb for the federal estate tax exemption—the value of assets in an individual’s estate that is shielded from potential estate tax liability. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the exemption amount (also known as the Applicable Exclusion Amount) gradually increased to $2 million for 2008, and has finally jumped to $3.5 million for 2009.

As the exemption has risen, the top tax rate for estates has declined to 45% in 2009, and under EGTRRA, the federal estate tax is scheduled to be repealed completely for 2010, only to return at pre-EGTRRA levels in 2011. While that still might happen, there’s a growing consensus for congressional compromise that would keep the estate tax but with a high exemption level—perhaps 2009’s $3.5 million.

With these changes afoot, it makes sense to take a fresh look at immediate and long-range estate plans. At a minimum, you should consider the implications of the higher estate tax exemption amount for 2009.

Prior to EGTRRA, the federal estate tax exemption for 2001 was only $675,000. But EGTRRA raised the exemption to $1 million for 2002 and started scaling back the highest tax rate from 55%.

If the estate tax makes its scheduled exit in 2010, which many believe is unlikely, another change will complicate tax planning. Under current law, people who inherit assets are allowed to “step up” the assets’ cost basis to their market value at the owner’s death. That step-up is supposed to go away in 2010, with heirs instead inheriting the original cost basis. That could increase capital gains tax liability when the assets are sold, and could force heirs to have to go through years of old documents to determine their basis. But there will be two key exceptions—a one-time $1.3 million step-up in basis, and an additional $3 million step-up for assets inherited from a spouse.

While much about the future of the estate tax remains up in the air, it’s important to have your will and trust documents revised to reflect the 2009 change to a $3.5 million exemption. Wealthy couples may also want to keep up to $3.5 million in assets in each spouse’s name to make the most of the estate tax exclusion. A credit shelter trust, for example, may use the maximum exemption to establish how much goes into the trust when the first spouse dies. But using the new, higher amount could shortchange the surviving spouse unless special provisions are made.

One strategy the new exemption level doesn’t affect is your ability to reduce your taxable estate through lifetime gifts. The annual gift tax exclusion increased in 2009, to $13,000 per recipient from $12,000 per recipient in 2008.

We can work with you and your estate planning attorney to determine whether your estate plan should be revised to factor these and other possible changes in estate laws.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.

©2018 Legend Financial Advisors, Inc.®. All rights reserved.