Tax Estates – Tax & Planning Alert

June 2008Alerts Tax & Estates Department Alert

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In Spring 2006, we alerted our clients and friends to some significant estate tax planning opportunities and pitfalls. This year, the concerns we had expressed have become even more pronounced. For 2008, the federal estate tax exemption remains at $2 million; as of January 1, 2009, the federal exemption will increase to $3.5 million.While this is good news for estates over $10 million, estates in the $3 -$10 million range where wills were drafted to maximize the use of the federal exemption via the use of a “credit trust” could see a substantial increase in the amount of state death taxes that will be required to be paid at the first death.

In New York, for example, the state estate tax exemption is only $1 million. The difference between the federal and state exemptions is taxable at the first death. Therefore, while the federal exemption remains at $2 million and the state exemption at $1 million, upon the first death, New York estate taxes will be $99,600. When the federal exemption increases to $3.5 million in 2009 and the state exemption remains at $1 million, the estate of the first to die will pay a New York estate tax of $229,000. New Jersey and Connecticut residents will be similarly affected.

This result can be remedied in several ways. Flexible language can be utilized to give the surviving spouse the choice to elect to pay no state estate tax at the first death by not taking full advantage of the federal exemption. Alternatively, the surviving spouse can elect to pay state estate tax at the first death by taking advantage of the higher federal estate tax exemption, thereby substantially reducing estate taxes at the second death. Regardless of the method used, it is important that a conscious decision be made so that excessive first-death or second-death taxes can be controlled.

Under current law, there will be no federal estate tax for decedents dying in the year 2010. In 2011, the tax is scheduled to return with the exemption dropping down to $1 million. A number of bills currently in Congress address this situation.While it is difficult to predict the specifics of any new tax bill, there is a consensus that we will continue to have a federal estate tax after 2009. The exemption will probably not be less than $3.5 million and may be indexed to inflation or even be increased over a period of years. It is even possible that the tax rates will be decreased. As the picture becomes clearer, we will advise you.

If there have been significant changes in your family circumstances (moving to a different state, receipt of a large inheritance, significant loss of assets, sale of a business interest, retirement, divorce, marriage or death, change in health of a family member, etc.), it may be a good time to revisit your estate plan. You should make sure that the identities of and the amounts left to your beneficiaries reflect your current wishes, that your fiduciaries (Executors and Trustees) remain appropriate, and that you have taken advantage of generation skipping options that can be utilized for the benefit of grandchildren. Health care proxies, powers of attorney, and living wills that were prepared before 2004 should be updated to reflect the stringent privacy provisions of the HIPAA law amendments.

Fox Rothschild’s vast resources in New York and around the country are available to you for traditional estate planning needs and beyond. Our practice areas encompass family law (e.g., divorce and pre-nuptial agreements), commercial and residential real estate, corporate matters (including structuring the sale or acquisition of a business), litigation, intellectual property, and employment matters, among many others.