A.                 Washington Report. Under current law, the federal estate tax exemption is $3,500,000 for a decedent who dies in 2009.  The federal estate tax will be repealed in 2010, but reinstated in 2011 with a $1,000,000 exemption.  Since these changes were enacted in 2001, there has been continued speculation that the estate and gift tax laws would be further modified before 2010. 

In January of this year, H.R. 336 was introduced by Representative Earl Pomeroy (D-ND) in an attempt to resolve the current uncertainty.  Representative Pomeroy’s bill would keep the federal estate tax exemption of $3,500,000; keep the top estate tax rate at 45%; and add a 5% surtax for estates over $10,000,000.  

H.R. 436 would also eliminate any discounts in valuing intra-family transfers.  Although there will continue to be many benefits to a family limited partnership from an asset protection point of view, the estate and gift tax benefits will be reduced if this provision of the bill becomes law. 

In March 26, 2009, Senator Max Baucas (D-MT), chairman of the Senate Finance Committee, introduced the Taxpayer Certainty and Relief Act of 2009 (S. 722).  As with Representative Pomeroy’s bill, S. 722 would also make permanent the current $3,500,000 exemption and keep the top estate tax rate at 45%.  These changes are consistent with budget proposals by the Obama administration.Under S 722, the exemption amount would be indexed for inflation starting in 2011.  This  spouse’s exemption, in addition to the surviving spouse’s own estate tax exemption.  S. 722 would re-unify the federal gift tax and estate tax by providing a single exclusion of $3,500,000. 

 B.        Illinois Legislation. 

Prior to 2009, the state exemption for the Illinois estate tax was the same as for federal estate taxes.  In 2009, the exemption for Illinois estate tax remained at the 2008 level of $2,000,000, while the federal exemption increased to $3,500,000.  This marks the first time since the Illinois estate tax was enacted that the federal and Illinois estate tax exemption amounts are not coordinated. 

 C.        Illinois Estate State Tax Rate is 16%. 

In estate plans with martial and residuary trusts, the residuary trust is usually funded to the maximum federal exemption, currently $3,500,000. Because the federal and Illinois estate tax exemptions are no longer identical, allocating more than the Illinois exemption amount to the residuary trust could result in an Illinois estate tax at the death of the first spouse.  Accordingly, it may be appropriate to limit the allocation of assets to your residuary trust to the maximum amount that will be free of both federal and state estate taxes at the death of the first spouse.  If you would like to review your estate planning or discuss this issue, please contact us. 

 D.        Gifting Provisions.

In 2009, the annual gift exclusion increased to $13,000 per donee (and $26,000 per donee for gifts by a husband and wife).  Annual exclusion gifts can be made in many forms – outright to adults, to custodial accounts for minors or to properly structured irrevocable trusts which qualify not only the annual exclusion but which may also be exempt from generation skipping taxes.  

E.       Retirement Benefits and Required Minimum Distribution. 

The Worker and Retiree Recovery Act of 2008 eliminates required    minimum distributions from IRAs and defined contributions plans (e.g., profit-sharing plans, 401(k) plans and defined contribution or money purchase pension plans) for 2009.  This change does not apply to defined benefit pension plans, and participants in those plans must still receive the minimum distribution required for 2009 by December 31, 2009 (or in the case of a participant who reaches age 70-1/2 in 2009, by April 1, 2010).