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Annual Gift Tax Exclusion Amount to Increase to $13,000 as of January 1, 2009

Client Advisory

October 29, 2008

The annual gift tax exclusion, the amount you can give to any individual each year without it being considered a taxable gift, is indexed for inflation, and the Internal Revenue Service has announced that in 2009 the amount will increase to $13,000 from the current $12,000. Thus a married couple will be able to give up to $26,000 to each of multiple recipients without incurring any federal gift tax. Only Connecticut, North Carolina and Tennessee impose a state gift tax; the Connecticut and North Carolina annual exclusion is the same as the federal exclusion.

Gifts of the annual exclusion amount to children, grandchildren and other beneficiaries are often recommended as an excellent way to reduce one‘s taxable estate at no transfer tax cost. Outright gifts to grandchildren of the annual exclusion amount will also be exempt from the generation-skipping transfer tax (the “GST”). Gifts in trust for grandchildren that qualify for the gift tax annual exclusion can also qualify for exclusion from the GST if the trust is properly structured. (Payments of tuition, if paid directly to the educational institution, and payments of medical expenses, if paid directly to the provider of the services, are also transfers that are not considered taxable gifts and are not subject to GST).

Gifts may be “split,” meaning that even if one spouse makes the entire gift, he or she may use the other spouse’s annual exclusion amount if that spouse consents. To illustrate, a wife can give the entire $26,000 to a child with no gift tax cost, as long as the husband consents to having his annual exemption applied to the gift. For this reason, many clients make the annual gifts in January, to be assured that both spouses are alive at the time of the gift.

Estate Tax Exemption Amount to Increase to $3,500,000 as of January 1

The estate tax applicable exemption amount, currently $2,000,000, is scheduled to increase to $3,500,000 for persons dying on or after January 1, 2009. This means that a married couple, if they use the exemption amount effectively, will be able to transfer up to $7,000,000 to non-charitable beneficiaries without any federal estate tax. For residents of many states, including New York, Connecticut and New Jersey, there may still be a state estate tax, albeit at a significantly lower rate than the existing federal tax rate, which is currently 45%. Also, state estate and inheritance taxes are available as a deduction in computing the federal estate tax.

The exemption from the GST will also be increased to $3,500,000 in 2009, but the lifetime exemption from the gift tax will remain at $1,000,000.

What the Future Holds

The estate tax and GST are scheduled to be repealed for persons dying in 2010, but to revert to the “old” rates (55% maximum) and exemption ($1,000,000) after December 31, 2010. This would result in a dramatically different estate tax being imposed on the estates of wealthy individuals dying in 2009, 2010 and 2011.

Many observers believe that Congress will enact changes that leave us with some form of estate tax. Senator Barack Obama, in his tax proposals, calls for an estate tax with a $3,500,000 applicable exemption amount and a fixed tax rate of 45% (the current rate). Senator John McCain, in his proposals, calls for an increased applicable exemption amount of $5,000,000 (to be indexed for inflation), and a fixed rate tied to the maximum capital gains tax rate, which he would keep at the present 15%. What Congress will in fact do, at a time when its attentions will be pulled in many different directions by the state of the economy and by a new administration, is impossible to predict.

The lawyers in the Trusts and Estates Department at Carter Ledyard & Milburn LLP can help you to structure your estate plan and your giving program to provide the maximum flexibility, to deal with whatever form the new tax laws take.


Questions regarding this client advisory may be directed to Edmund J. Behan at (212-238-8630, behan@clm.com), Jerome J. Caulfield at (212-238-8809, caulfield @ clm.com), Michael I. Frankel at (212-238-8802, frankel@clm.com), Stephen F. Lappert at (212-238-8717, lappert@clm.com), Daniel J. McSwiggan at (212-238-8760, mcswiggan@clm.com), Ronald Spencer at (212-238-8737, spencer@clm.com), M. Antoinette Thomas at (212-238-8713, thomas@clm.com ) or Theodore R. Wagner at (212-238-8705, wagner@clm.com)

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2014 Carter Ledyard & Milburn LLP.
© Copyright 2008

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