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New estate and generation-skipping tax exemptions create opportunities

As the old saying goes, when a door closes, a window also opens. With the state of today’s economy, many people probably feel like doors have closed. However, there are some great "windows" now opening in the estate and gift planning areas.

One such opportunity is the increase in the federal estate tax exemption. It has increased to $3.5 million per person this year from $2 million per person last year. The exemption applies only at your death; the federal gift tax exemption remains unchanged at $1 million per donor. However, for those persons who pass away in 2009, this increase is substantial; it can save an estate up to $675,000 in estate taxes.

In case passing away in 2009 isn’t quite the opportunity you had in mind, another tax-saving opportunity is a late allocation of your federal generation-skipping tax exemption (GST exemption). The GST exemption also increases to $3.5 million in 2009 (from $2 million in 2008). Thus, a full $1.5 million more can now be transferred to a younger generation (e.g., trusts for children’s lives or directly to grandchildren) free of federal generation-skipping tax. This GST exemption increase does apply to your lifetime transfers, unlike the estate tax exemption increase.

You may be able to take advantage of this opportunity even if you transferred property in 2008 (or earlier). This "late" opportunity is available to people who (i) have established a trust that may be subject to federal generation-skipping tax in the future, either wholly or partially; (ii) have made prior contributions to that trust and (iii) are still living. If these conditions exist, then you can file a gift tax return and elect to make a late allocation of your remaining GST exemption, up to $3.5 million. If you exhausted your GST exemption before you made the gift, you now have a new supply to use!

Historically, one of the problems with making a late GST exemption allocation to a trust is the increased valuation of the trust property. When the GST exemption is allocated late to a trust, it is based on the value of the trust property as of the allocation date. Thus, in order to cover the same trust assets, a larger portion of the GST exemption allocation must be used to cover the appreciation of the trust property since the date of contribution.

Here is where the current economy opens a great "window" of opportunity. Many assets now have a depressed value. Thus, there is not as much, if any, appreciation to cover. For example, if the trust assets to which the late allocation is to be made consist of publicly traded stock, the value of those assets are more than likely low and may well be lower than when the assets were initially contributed to the trust. Due to the depressed value of the assets, your GST exemption can be allocated to cover more trust assets. Once the economy bounces back, all future appreciation of the trust assets to which the GST exemption was allocated will pass entirely exempt from federal generation-skipping tax.

A late GST exemption allocation can be made by filing a late 2007 gift tax return. If filed in February 2009, you can use the trust value as of February 1. Of course, you can wait and make the late allocation on your 2008 gift tax return. However, if you do so you will have to use the trust value as of the month of filing. By that time, the value of the trust may have increased, meaning more GST exemption would need to be allocated to exempt the same trust assets. Act now to take advantage of this excellent opportunity!

  • Partner

    John is a partner in the firm's Estate Planning Department. He focuses his practice on estates, trusts, family business and disability planning, and the administration of estates and trusts. John also has an active health law ...

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