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November 27, 2007
Federal and State Tax Laws Call for
Year-End Planning and Review
By Gregg M. Simon and Gregory B. Mann
As the end of the year quickly approaches, it is important to remember that there are many federal and state income, estate, gift and generation-skipping transfer tax laws that may have a direct impact on you. Therefore, now may be a good time to engage in a year-end review of your estate plan, with special consideration of the following:
Charitable Distributions from IRAs. Previously, gifts from IRAs to charities were treated as taxable distributions to the donor. Under the Pension Protection Act of 2006, through December 31, 2007, individuals who have attained age 70½ can make tax-free distributions of up to $100,000 from their IRAs to public charitable organizations (but not private foundations). Such distributions would not be included in the donor's taxable income but would qualify toward the required minimum distributions for the year donated.
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Annual Exclusion Gifts. For 2007 and 2008, individuals can make an unlimited number of gifts of up to $12,000 per recipient, per year. If not made by the end of the year, that year's exclusions will be lost. Moreover, gifts made earlier in the year are generally more beneficial due to the income and appreciation inuring to the benefit of the donee rather than the donor.
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Tuition and Medical Gifts. Additional unlimited gifts can still be made by paying tuition costs or medical expenses directly to the provider.
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Estate Tax Exemption. The amount that an individual may pass free of federal estate taxes is currently $2 million, rising to $3.5 million in 2009, and becoming unlimited in 2010. However, in 2011 it will decrease to $1 million. In addition, the federal government no longer shares the estate tax with the states and, in a number of states, the federal and state estate tax exemptions have been decoupled. (i.e., Even though the federal Applicable Exemption Amount will rise to $3.5 million in 2009, under current Illinois law, only $2 million will be able to pass free of Illinois estate tax.) If you have not reviewed your estate planning documents in the last few years, now is an important time to do so in order to incorporate updated and more tax-advantageous formulas into your documents.
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State Estate Taxes. As explained above, the federal government no longer shares the estate tax with the states. To the extent that a decedent is subject to estate tax in his or her state of residence, the federal government now allows for a deduction. Illinois residents may incur state estate taxes at a top rate of 16% (which, after the federal deduction, results in a marginal rate of approximately 8.3%). You should note that several states — including Arizona, California, Florida and Nevada — currently have no state estate tax.
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Lifetime Gift Exemption. Although an individual can currently pass $2 million free of estate tax upon death, the same amount cannot be given away during lifetime without incurring a gift tax. The lifetime gift exemption remains at $1 million (in excess of the annual exclusion, tuition and medical gifts).
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Estate and Gift Tax Rates. Under current law, the top estate and gift tax rate remains at 45% for 2008-2009, will be 0% in 2010, but will rise to 55% in 2011.
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Generation-Skipping Transfer Tax Exemption. In order to ensure a 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 ($2 million as of 2007) can pass generation-skipping tax free to grandchildren and more remote descendants.
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For More Information
These and other federal and state laws can have significant financial consequences for you and your family. We recommend that you speak to your Much Shelist attorney or contact a member of our Wealth Transfer & Succession Planning practice group to determine appropriate strategies that meet your objectives and address your circumstances.
Circular 230 Notice. To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is 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.
Gregg M. Simon, Chair of the firm’s Wealth Transfer & Succession Planning group, concentrates his practice in estate planning, federal estate and gift taxation, probate and trust administration, and business planning. Gregg can be reached at 312.521.2605 or gsimon@muchshelist.com.
Gregory B. Mann, Vice Chair of the firm's Wealth Transfer & Succession Planning group, designs and implements estate and gift tax plans for individuals and family groups. His practice also includes implementing succession planning techniques for closely held corporations, administering probate estates, income tax planning, and preparing gift and estate tax returns. Greg can be reached at 312.521.2461 or gmann@muchshelist.com.
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