We still have a Federal estate tax. The death tax-free exemption amount is $3.5 million for 2009 with a top estate tax rate of 45%. Under current law, the estate tax is scheduled to be repealed for one year in 2010, but revert to its pre-2001 Tax Act level of only $1 million per taxpayer for persons dying in 2011 or thereafter, with a top tax rate of 50%.

Congress has been discussing, and we anticipate they will enact, a one-year extension of the estate tax for 2010 with a tax-free exemption amount equal to $3.5 million and a top estate tax rate of 45%. Congress will likely attempt to address long-term solutions for the estate tax
in 2010.

Annual Exclusion Gifts

In 2009, you may make a gift of $13,000 to any individual and certain trusts without any gift tax consequences. Married individuals may make gifts of up to $26,000. Gifts may be made outright or in trust and may be in the form of cash, securities, real estate, artwork, jewelry or other property.

Giving property that you expect to appreciate in the future is an excellent way of utilizing your annual exclusion gifts because any post-gift appreciation is no longer subject to gift or estate tax. While the economic downturn has hit everyone, making gifts of assets with deflated prices may prove advantageous in the long-run as you are able to remove more assets from your taxable estate without incurring a current gift tax obligation. To take advantage of your annual exclusions for 2009, gifts must be made by December 31. Gifts over $13,000 or gifts that will be “split” between spouses must be reported on a gift tax return, which must be filed in April 2010. The annual exclusion amount will remain at $13,000 in 2010 ($26,000 for married couples).

Payment of Tuition and Medical Expenses

In addition to annual exclusion gifts, you may pay tuition and medical expenses for the benefit of another person without incurring any gift or generation-skipping transfer (“GST”) tax or using any of your estate or GST tax exemption. These payments must be made directly to the educational institution or medical facility. There is no dollar limit for these types of payments and you are not required to file a gift tax return to report the payments.

Lifetime Gifts Using Gift Tax Exemption

In addition to annual exclusion gifts and the payment of tuition and medical expenses, individuals are also allowed a lifetime gift tax exemption. The gift tax exemption amount is currently a flat $1 million and is scheduled to remain at that level through 2010. Many clients make use of their $1 million lifetime exemptions by gift strategies such as Grantor Retained Annuity Trusts and other techniques that leverage the use of the exemption. A gift of appreciating property during your lifetime removes all future appreciation from your taxable estate at your death.

Generation Skipping Tax

The generation-skipping transfer (“GST”) tax is still in place. Generally, the tax applies to lifetime and death-time transfers to or for the benefit of grandchildren or more remote descendants, at a 45% flat rate for 2009. The tax is in addition to any gift or estate tax otherwise payable. However, each taxpayer is allowed a $3.5 million GST tax exemption for 2009. Like the estate tax, the GST tax is scheduled to be repealed for one year in 2010. However, along with the estate, it is anticipated that the GST tax will be extended for one year with an exemption amount of $3.5 million for 2010.

Consider Lifetime Gifts that take Advantage of both the Gift Tax Exemption and GST Exemption

Many clients utilize their $1 million gift tax exemption ($2 million for a married couple) by structuring long-term GST exempt trusts benefiting multiple generations. Such trusts will remain exempt from all gift and estate tax as long as the trust remains in existence. Under Illinois law, such trusts can last in perpetuity, thereby allowing you to create a family endowment fund for your children, grandchildren and future descendants.

Take Advantage of Today’s Low Interest Rates

Interest rates remain at historically low levels. Low interest rates enhance the benefits of several gift and estate planning strategies. One such strategy is the “grantor retained annuity trust” or GRAT. A GRAT is an irrevocable trust to which a donor transfers property and retains the right to receive a fixed annuity for a specified term. At the expiration of the term, the property usually passes outright or in trust for the benefit of descendants or other named beneficiaries. The amount of the gift resulting from the transfer of the property to the GRAT is the present value of the remainder interest that passes to the beneficiaries at the end of the term. Under the valuation methods adopted by the IRS, the lower the interest rate at the time of the gift, the lower the present value of the remainder interest and the smaller the amount of the gift that must be reported to the IRS. Interests in closely held family businesses are often ideal properties to transfer to a GRAT.

Low interest rates also make sales to “defective” grantor trusts more attractive. Under this strategy, a taxpayer creates a trust, typically for his or her spouse and descendants. The taxpayer then sells assets to the trust taking back a note requiring the trust to repay the taxpayer in installments. The trust is structured so that it is ignored for income tax purposes, resulting in no income tax consequences upon the sale. The interest paid on the note is typically at the applicable federal rate, which changes month to month based on current market rates. The lower the interest rate on the note, the greater the amount of assets that will accumulate in the trust free of estate, gift and GST taxes.

For more information about business succession planning and wealth transfer planning, please contact Gregory M. Winters at 312/840-7059 or gwinters@burkelaw.com or the other members of the Wealth and Succession Planning Group: Karen K. MacKay, Stephanie H. Denby, Marty P. Ryan, Jonathan W. Michael, Melanie L. Witt, Mary K. McWilliams and Melissa C. Selinger.