Preparing for Year-End: Wealth Transfer and Succession Planning
As 2008 comes to a close, so do opportunities to take full advantage of a number of federal and state income, estate, gift and generation-skipping tax laws. In some cases, you must take action by December 31, 2008 in order to obtain maximum benefits for the current tax year; likewise, other changes in the law will become effective on January 1, 2009.
Now is the time to carefully weigh your options and determine appropriate strategies.
Annual Exclusion Gifts
In 2008, individuals can make an unlimited number of gifts of up to $12,000 per recipient. That cap will rise to $13,000 per recipient in 2009. As long as the gifts are made by December 31, 2008, they are eligible for exclusion from the gift tax. It is important to note that gifts made earlier in the year are generally preferable, as the income and appreciation inures to the benefit of the donee rather than the donor.
Estate Tax Exemption
In 2009, the individual federal estate tax exemption will jump from the current $2 million to $3.5 million. Although scheduled to expire in 2010, the estate tax remains a hot topic in Washington, D.C., so it is likely that some form of renewed exemption will be signed into law before then. Gifts in excess of $1 million remain subject to the gift tax, even if the estate tax expires.
Estate and Gift Tax Rates Remain High
For 2008 and 2009, the top federal estate tax and gift tax rates are at 45%, with combined top marginal federal and Illinois estate tax rates averaging approximately 50%. If no further legislative action is taken, the federal estate tax is scheduled to drop to 0% in 2010, but will rise to 55% in 2011.
Generation-Skipping Transfer Tax Exemption
In order to ensure a federal death tax at each successive generational level, a generation-skipping transfer tax is imposed on transfers to grandchildren or more remote descendants at the top estate tax rate. However, the same amount that can pass free of estate tax to children ($2 million in 2008 and $3.5 million in 2009) can pass tax-free to grandchildren and more remote descendants.
Finding a Silver Lining in the Dark Economic Clouds
Assets with "temporarily" depressed values due to the current economic conditions, but whose values are expected to recover, would be good targets for a giving program. Based on the current applicable laws, the increase in value when the economy recovers and the appreciation thereon would pass to the donees gift tax-free. The lower current applicable federal interest rates also make gifting through a grantor retained annuity trust (GRAT), a charitable lead trust (CLT), intra-family loans, and the sale to grantor trust technique even more beneficial.