ALERT - Estate Planning in 2009 and Beyond

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October 30, 2009

Increased estate tax exemption amounts could affect your existing estate plan; proposed legislation may change certain estate planning techniques; and a down economy could present great opportunities for estate planning.

Federal estate tax exemption changes

Currently, the individual federal estate tax exemption amount is $3.5 million.  This means that a married couple could shelter at least $7 million in assets through proper estate planning.  Following the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the individual exemption amount increased as follows:

$675,000 in 2001
$1,000,000 in 2002 – 2003
$1,500,000 in 2004 – 2005
$2,000,000 in 2006 – 2008
$3,500,000 in 2009

Under current law, EGTRRA is scheduled to “sunset” in 2010, resulting in a complete repeal of the estate tax, followed by the reinstatement in 2011 of the 2001 estate tax exemption amount and top marginal tax rate of 55 percent.  Congress currently is considering several proposals that would further modify the estate and gift tax, including proposals that would potentially extend the $3.5 million exemption amount permanently (thus cancelling the one-year estate tax “repeal” in 2011).  Although the outcome of this proposed legislation is yet unknown, most commentators do not believe the federal estate tax will be repealed.

Do your estate planning documents reflect your wishes?

Many estate planning documents utilize a formula to allocate assets to a “credit shelter” or “family” trust at death.  Often, this formula directs an amount equal to the federal exemption amount to a credit shelter trust, with the remainder of estate assets passing to a surviving spouse and/or children.  If your estate plan was created before the recent increases in the exemption amount, your plan may no longer allocate assets in a manner consistent with your wishes.

For example, if your estate planning documents were created in 2001 – and utilized a formula to fund a credit shelter trust with an amount equal to the federal exemption amount – the credit shelter trust would have been funded with $675,000 in 2001.  Now, under current law, that maximum funding amount would be $3.5 million, substantially changing allocation of the estate’s assets.  For example, in a $3.5 million estate:

• $675,000 would have passed to the credit shelter trust in 2001, leaving $2.825 million to pass outside the credit shelter trust to a surviving spouse or children;

• the entire $3.5 million would be allocated to the credit shelter trust under current law, leaving no assets remaining to pass outside the credit shelter trust.

Minnesota estate tax exposure

In addition, the recent changes to the exemption amount may cause your estate to pay Minnesota estate tax.  Minnesota’s estate tax exemption has remained fixed at $1 million since 2001, and has not increased on par with the federal exemption amount.  As a result, there now exists a $2.5 million “gap” between the $1 million Minnesota exemption amount and the $3.5 million federal exemption amount for 2009.  Formula funding of a credit shelter trust to the maximum $3.5 million federal exemption amount could generate a Minnesota estate tax liability of approximately $229,200. 

The increased exemption amount may affect your existing estate plan in a number of ways, including how your assets are allocated and whether Minnesota estate tax is payable upon your death.  You should review your estate planning documents carefully to ensure they continue to reflect your wishes, taking into consideration current law.

Additional proposed changes to federal law

Grantor retained annuity trust (GRAT)

A GRAT allows an individual (the “grantor”) to transfer ownership of rapidly appreciating assets to an irrevocable trust and retain an annuity interest for a trust term of a specified number of years.  GRATs often are funded with highly volatile assets that are expected to appreciate at a rate in excess of the theoretical interest rate set forth by the IRS.  Often, successful GRATs have a short term of two to three years.  At the end of this trust term, the remaining property passes to the remainder beneficiaries of the trust.  If properly structured, a GRAT may incur no gift tax at funding, allowing the grantor to pass on substantial assets to the GRAT beneficiaries free of gift tax.

In order to realize the tax benefit of a GRAT, the grantor must survive the trust term.  Currently, GRATs often are structured with a term of as little as two years; however, proposed legislation would require a minimum ten-year term.  This term change would reduce the likelihood that GRAT assets would “outperform” the IRS theoretical interest rate over the duration of the trust period.  Further, this increased minimum term may reduce the likelihood that the grantor will survive the trust term, therefore limiting the success of a GRAT as an estate planning tool.

Stock concentrations, certain real property holdings, and other business interests may be ideal assets for funding a GRAT.  Clients who may be interested in creating a GRAT under current law are encouraged to contact us to determine whether this estate planning technique is right for you.

Family Limited Partnerships (FLP)

An FLP is a sophisticated estate planning tool that may allow an individual to pass assets to family members at a substantial gift tax “discount.”  In an FLP, the donor makes gifts of nonvoting or limited partnership interests to family members, while maintaining a voting or general partner (controlling) interest. 

While there are many non-tax reasons for creating FLPs, part of their appeal lies in the fact that, for estate tax purposes, the value of a nonvoting or limited partnership interest may be discounted by approximately 20-40 percent (or more) for lack of marketability, minority interest and lack of control.  Proposed legislation, however, would place new limitations on valuation discounts in FLPs, significantly decreasing or, in some cases eliminating, valuation discounts and the accompanying transfer tax savings. 

Estate planning opportunities in a down economy

The recent economic downturn has created several opportunities for estate planning.  With asset values down, now may be a good time to consider transferring the assets, and future appreciation on the assets, from your estate.

Qualified personal residence trust (QPRT)

A personal residence trust may allow you to transfer substantial appreciation on your homestead or vacation residence, free of gift tax.


Historically low interest rates and depreciated asset values may present an excellent opportunity to transfer wealth with little or no gift tax consequences.


If you have an existing GRAT that was adversely affected by the economic downturn, now may be an ideal time to consider a “re-GRAT” by substituting less volatile assets for the assets in your current GRAT, then using the more volatile assets to fund a new GRAT.

Briggs and Morgan's estate planning attorneys can help you navigate the changing law.  Please contact us to review your current estate plan and to discuss how current or proposed legislation may affect it.

This publication is circulated to bring useful and timely information to our clients and colleagues. The publication is for general information purposes only and is not legal advice. You should not rely on any information or views contained in the publication in evaluating any specific legal issues you may have. Please consult your Briggs and Morgan attorney for specific legal advice. Any U.S. Federal tax advice contained in this communication (whether distributed by mail, email or fax) is not intended or written to be used, and it cannot be used by any person for the purpose of avoiding U.S. Federal tax penalties or for the purpose of promoting, marketing or recommending any entity, investment plan or other transaction. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)