Manish C. Bhatia

Today, Estate Planning is more essential than ever. With the top Federal estate tax rate at 45%, an annually changing Federal estate tax exemption and drastic changes in the Illinois death tax laws, proper planning can prevent even a modest estate from having to pay thousands of dollars in legal fees as the probate court decides how and when to distribute your property.

Please click on the links above to explore the services we provide and why they are essential to protect your wishes, your assets and, most importantly, your family.

May 18, 2009–According to the Wall Street Journal, President Obama and his administration have set their sights on the estate tax and gift tax advantages available to those who utilize Grantor Retained Annuity Trusts (GRAT) and Family Limited Partnerships (FLP) or Family Limited Liability Companies (FLLC).

According to the article, the administration has proposed to set a minimum term of 10 years for GRATs, which would certainly make the estate planning technique less appealing. A GRAT whose grantor fails to outlive its term reverts to the grantor’s estate. Because of this, short-term GRATs have thrived.

Additionally, the administration is targeting the discounts that are taken for lack of marketability and minority interest for FLPs and FLLCs. Though it is unclear what restrictions President Obama is looking to impose, the article does state that restrictions on the interests that the family has the capability, and possibly the intention, of removing are considered  inappropriate and abusive.

Certainly a lot going on in Washington, D.C. for us estate planners to follow. Stay tuned…

April 10–The Illinois Legislature is currently considering an lllinois only qualified terminable interest property (QTIP) provision (HB0255) that would allow an estate to make a QTIP election for state death tax only. Why is this important?

With the decoupling of Illinois from the Federal estate tax exemption, Illinois’ exemption is at $2 million while the Federal exemption increased on January 1, 2009, to $3.5 million. Therefore, if an estate wishes to defer paying any inheritance tax, it may only utilize $2 million of the Federal exemption. If the estate wishes to use the full $3.5 million Federal exemption, it will owe Illinois death tax on the $1.5 million by which the Illinois exemption is exceeded.

However, the state-only QTIP, which has been implemented by several states already, offers a solution. By electing QTIP treatment for Illinois death tax purposes only, the full $3.5 million can pass under the Federal exemption, while $2 million of that property is exempt from Illinois death tax and the other $1.5 million (QTIP) passes free of Illinois tax courtesy of the marital deduction. Upon the second death, the full $3.5 million will be outside of the surviving spouse’s estate for Federal estate tax purposes. For Illinois death tax purposes, $2 million will be outside of the surviving spouse’s estate, while $1.5 million will be included in the surviving spouse’s estate.

Needless to say, this could be a very useful tool for estate planners in the state of Illinois.

See the full text of the proposed legislation here.  The legislation passed the House on March 24, 2009, by a vote of 112-001-000.

April 9–According to CCH, on March 26, Senator Max Baucus (D-Mont.), Chairman of the Senate Finance Committee , introduced a bill, the Taxpayer Certainty and Relief Act of 2009 (S. 722), that would make significant changes to the Federal estate tax.  The legislation would make the 2009 estate tax permanent.  The estate tax is  currently set at a 45-percent tax rate with a $3.5 million exemption and is set to expire for 2010.  The exemption would be indexed for inflation under the new legislation.

Additionally, on April 2, lawmakers approved an alternate proposal, offered by Senator Blanche Lincoln (D-AR) and Senate Minority Whip Jon Kyl (R-AZ), that would reduce the rate from 45 percent to 35 percent in 2010 and permanently raise the exemption level to $5 million.

The uncertainty of the future of the estate tax makes flexibility essential in planning.  This is likely to be only the beginning of the debate regarding the estate tax.  With the federal deficit where it is, the government can hardly afford to lose the revenue that is raised by the tax.