What Has Happened in the First Quarter of 2009 and What Can We Expect?

James Carolan
May 6, 2009 — 1,371 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

We ended 2008 with the market giving us a very bumpy ride, and we continue to need to keep our seat belts fastened each day in 2009 so far.

We have a new administration in Washington, and the Democrats in control of the White House and both houses of Congress. The current tax law moved our estate tax exemption amount to $3,500,000 for this year, the annual gift tax exclusion amount increased to $13,000, however we still have a lifetime maximum of $1,000,000 for gift tax purposes because the gift and estate taxes have not been reunified as of yet. At the time that I am writing this Congress is debating the "Stimulus Package" designated as HR-1 (the American Recovery and Reinvestment Act of 2009) and attempting to reconcile the differences in the House and Senate bills, with President Obama pushing for approval before Valentine's Day.

On December 23, 2008 the Worker, Retiree and Employer Recovery Act of 2008 was signed by President Bush and became law (Public Law No. 110-458). The market decline of 2008 meant that many people were faced with having to sell out of equities in order to meet their required minimum distribution (RMD). With a declining market and being forced to sell at the worst possible time the market would be affected even more than usual. For 2009 however this act waived the RMD rules; normal withdrawal rules are expected to apply once again in 2010 however. This waiver only affects 2009 RMD however, 2008 RMD still must be taken or face penalties.

Where are we headed on estate taxes? By all accounts, we will not see the elimination of estate taxes in 2010. According to the Wall Street Journal (January 12, 2009, "Estates of Pain") President Obama (then President-Elect) and Congressional leadership plan to keep the exclusion amount at $3,500,000 and the tax rate at 45%. As he moves from Candidate Obama to President Obama and through the economic stimulus plan we should get a better idea of the extent and timing of the estate and gift tax changes.

One resolution in Congress that we as estate planners need to keep watch over is HR 436 which addresses the sunset provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001. HR 436 - the Certain Estate Tax Relief Act of 2009 - was introduced January 9, 2009 and among its provisions are estate and gift tax issues, as well as valuation discounts. The first part of this proposal fixes the applicable exclusion amount at $3,500,000 effective January 1, 2010. The maximum estate and gift tax rate is set at 45%; it also adds in a surtax of 5% for amounts over $10,000,000 up to an amount that eliminates the benefit of the $3,500,000 estate tax exemption (making the 45% a flat tax on larger estates). The lifetime exclusion for gifts is raised to $3,500,000. The modified carry over basis rule would not be implemented in 2010, and we would continue the step up in basis rule we have today.

The IRS dislike of family limited partnership entities and the valuation discounting is no secret to the estate planning community. Section 4 of HR 436 changes the rules on appraising assets transferred to entities like family limited partnerships dramatically. Any "non business" assets held by partnerships cannot be appraised with any discount - in other words discounts for lack of marketability and control cannot be applied to the passive assets. A FLP funded with cash and marketable securities therefore would have no discounts applied and be valued as if the entity didn't exist.

James Carolan