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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2009
CCH Whole Ball of Tax
is available in print. Please contact:
Leslie Bonacum
(847) 267-7153
Neil Allen
(847) 267-2179

Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at:

2009 CCH Whole Ball of Tax
Release (11) | Back to WBOT

2009 CCH Whole Ball of Tax

Leslie Bonacum
, 847-267-7153,
Neil Allen, 847-267-2179,

Sunset for Estate Taxes Not Likely; 2009 Will Be Active Year in Estate Taxes

(RIVERWOODS, ILL., January 2009) – With the estate tax set to be fully repealed for 2010 and the U.S. economy facing big challenges, the adage that nothing is certain but death and taxes may be more true than ever as lawmakers are likely to focus significant attention this year on ensuring that estate taxes do not go down to zero next year as current law directs, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit law information, software and services (

“Less than two percent of estates are subject to estate tax, but that still represents billions of dollars in estate tax payments each year,” said CCH Senior Estate Tax Analyst, Bruno Graziano, JD, MSA. “Given the significant U.S. deficit and reduced sources of tax revenue, it’s highly unlikely lawmakers will allow the estate tax to be repealed even for only one year. At the same time, allowing it to increase significantly or expand to impact more estates would be too jarring for many taxpayers.”

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the maximum estate tax rate has dropped steadily from 55 percent in 2001 to the current 45 percent. In addition, during that same period, the amount of property excluded from the estate tax has risen from $675,000 to $3.5 million in 2009, up from $2 million in 2008. The current law calls for a full repeal of estate taxes in 2010 before jumping back to the pre-EGTRRA rate of at least 55 percent in 2011, plus a 5-percent surcharge on large estates. Similarly, the amount excluded from estate taxes would drop to $1 million.

The new administration’s campaign agenda proposed to hold steady the maximum estate tax rate at the 2009 45-percent level on estates in excess of $3.5 million. This amount is also likely to be indexed for inflation, helping to alleviate some of the issues that had increasingly added pressure to the estates of even the moderately wealthy prior to EGTRRA.

“Pre-EGTRRA, the amount of property excluded from the estate tax was relatively low and was not indexed for inflation, so more and more people’s estates were becoming subject to taxes, even though they were not extremely wealthy,” said Graziano, adding that the new administration anticipates its proposal will reduce the number of taxable estates significantly as compared to 2000, which was prior to EGTRRA.

Estate Planning in Uncertain Times

Meanwhile, estate planners and their clients are facing the reality that their estates are significantly diminished given the upheaval in real estate and stocks. And although most are certain estate taxes will continue, they’re not certain about the details.

“In the matter of a year, many individuals have had to retool their estate plans from focusing on wealth preservation to wealth restoration with the value of real estate and stocks dropping,” Graziano said. “The bad news is that their estates obviously are worth less today, but assuming the taxpayer believes these assets will appreciate over the long term, transferring them out of the estate at their current lower value can minimize future estate taxes.”

Minimizing or eliminating estate tax obligations and leaving more to heirs or other designated beneficiaries starts with an understanding of the three basic tax exclusions that come into play in estate planning:

  • Annual gift tax exclusion – Gifts of any property, including money, are generally taxable for gift tax purposes. However, under the annual gift tax exclusion an individual can gift a certain dollar amount per donee each year and a married couple can gift double that amount. For 2009, the annual gift tax exclusion is $13,000 ($26,000 for a married couple electing gift splitting), up from $12,000 and $24,000, respectively, in 2008. Because this limit is per donee, an individual could, for example, gift $13,000 to each of her three children in 2009, with $39,000 being excluded from gift taxes; similarly a couple could gift $26,000 to each of their three children, with $78,000 excludable from gift taxes. There is no gift tax on property given to a spouse who is a U.S. citizen or to a qualified charity. Other exceptions to gift tax that are not subject to the annual limit include qualified tuition or medical expenses paid directly to a medical or educational institution on behalf of a donee.
  • Lifetime gift tax exclusion – A taxpayer who gives more than the annual gift tax exclusion to any one donee in a year must file a gift tax return (IRS Form 709). However, the taxpayer still does not owe a gift tax until he has given, cumulatively, more than is allowed under the lifetime gift tax exclusion. For 2008 and 2009, the lifetime gift tax exclusion remains unchanged at $1 million.
  • Estate tax exclusion – Beyond a certain dollar amount, estate tax is applicable to an individual’s estate at the time of death. For 2009, up to $3.5 million of an estate is excludable from the estate tax, an increase from $2 million in 2008. Allowable deductions that can be taken before arriving at the taxable value of the estate include debts owed at the time of death; funeral expenses paid by the estate; the marital deduction, which is the value of the property an individual passes on to a surviving spouse; charitable deductions made by the estate; and a state “death tax” deduction for estate, inheritance, legacy or succession taxes paid to any state or the District of Columbia.

Estate and gift taxes are tied together in that taxable gifts are added back in the computation of a decedent’s federal estate tax bill. Accordingly, whatever amount of the lifetime gift tax exclusion a taxpayer uses effectively reduces the amount that can pass through his estate tax-free at death. 

“Without limits on annual and lifetime gifts, there would be minimal tax ramifications for estates, because people could simply give their money to their children – or whomever they planned on passing their wealth to – during life and not have to worry about the taxes that would be paid on their estate at death,” said Graziano.  

Impact of State’s Estate Tax and Inheritance Tax

Complicating estate planning is that several states impose their own estate taxes and many states also collect inheritance tax.

Historically, states had followed federal estate tax law. Since EGTRRA, however, 12 states and the District of Columbia have retained their estate taxes, based upon the expired state death tax credit from the federal estate tax law, as a way of holding onto tax revenues. These states are Illinois, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, North Carolina, Oregon, Rhode Island, Vermont and the District of Columbia. Kansas and Oklahoma have repealed their estate taxes effective for the estates of decedents dying after December 31, 2009.

In addition, three states – Connecticut, Ohio and Washington – have their own estate tax not tied to EGTRRA.

Eight states also collect an inheritance tax, which is solely a state tax assessed on the portion of an estate received by an individual (versus an estate tax, which is a tax assessed on the entire estate before it is distributed to individual parties). These states are Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee. Assets transferred to a spouse are exempt from the tax, and some states also exempt assets transferred to children and close relatives.

The rate and amounts taxable vary considerably. For example, Arizona has no estate tax while Rhode Island and New Jersey tax estates over $675,000 and Ohio taxes estates over $338,333.

Accelerating Gifting and Using QPRT and Other Trusts to Minimize Estate Taxes

Affluent individuals with many potential donees and estates consisting of slightly more than the estate tax exclusion amount may be able to minimize their estate tax obligations by simply using the gift tax exclusion over several years.

“If you are gifting stock, for example, that has dropped in value considerably over the past year but that you expect will rebound, you could be giving a lot more shares now than 18 months ago when the stock market was much higher,” Graziano said.

For many affluent individuals, however, gifting at the current $13,000 per donee per year, even given the increase in the upper limit of gift tax exclusions, won’t allow them to transfer wealth as effectively as some other techniques. It also carries the risk that the individual may die before being able to gift the planned amount. As a result, more sophisticated estate planning techniques are available for those looking for greater security or who have larger estates with which to deal.

Although there are dozens of techniques for estate wealth preservation, among the most common are various types of trusts and family limited partnerships or limited liability companies.

With real estate prices down, qualified personal residence trusts (QPRTs) are among trusts gaining interest from individuals seeking to reduce their gift taxes while passing on the family home to future generations, according to Graziano.

Qualified Personal Residence Trusts

A QPRT allows a taxpayer to transfer his interest in a principal residence or vacation home from his estate into an irrevocable trust while retaining the right to live in the residence or collect income from the residence for a fixed number of years.

The main gift tax advantage of the QPRT is that when the residence is transferred, the taxpayer does not pay gift tax on the full fair market value of the property but only on the full value of the property reduced by the value of the interests the taxpayer has retained. This form of leveraging can result in significant tax savings.

For example, suppose there is a 55-year-old taxpayer who owns a personal residence with a fair market value of $1.5 million and has already used his lifetime exclusion amount for gift tax purposes. The taxpayer could take three approaches to transfer the property to his only child:

  1. Make an outright gift of the property. Had he done this in 2008, he would now owe a gift tax of $660,000 on the transfer, based on the current gift tax rules.
  2. The taxpayer could leave the residence to his only child at death; he would then pay estate tax not only on the $1.5 million but also on any appreciation on the property between now and the time of his death. Assuming real estate values rise and estate taxes remain at current levels this could mean a tax significantly higher than $660,000.
  3. The taxpayer could transfer the property to a QPRT and, assuming he survives until the end of the trust term, for example 15 years, the result would be a significant tax savings:

    Rather than paying gift tax on the full $1.5 million, the grantor would pay tax on $1.5 million less the value of the 15-year income interest and the value of the grantor’s contingent reversion. The effect of the reversion will be to cause the trust property to revert to the grantor’s estate if he or she dies before the end of the trust term. When a grantor retains both an income and a reversionary interest, both are counted in determining the present value of the grantor’s gift. This present value calculation is performed using IRS-approved actuarial tables applying the age of the grantor and a prescribed interest rate. Accordingly, under these facts, the gift tax liability could be reduced by more than one-half as compared to that described in Scenario 1 above.

Additionally, QPRTs can be drafted so that the property can be leased back from the child.

“Rent, while subject to income tax, is not viewed as a gift for tax purposes so it’s not subject to the gift tax exclusion limits. This makes it another effective way to pass on income to future generations,” Graziano said.

The longer the trust term – or the length it takes to fully transfer the asset – generally the more favorable the tax advantages. For example, the longer the trust-term, the lower the gift value for gift-tax reporting.

The longer it takes to transfer the property, however, the greater the possibility that the taxpayer will die before the transfer is complete. Should this occur, the full value of the home is included in the estate for purposes of calculating the estate tax.

“QPRTs are an effective estate planning and gift-transfer tool, but people need to go into them with their eyes open if they’re going to have the desired impact,” Graziano said. He added that there are a number of factors that, in addition to the health of the grantor, can impact their value, including how quickly real estate values rebound and how long the beneficiaries plan to keep the home.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business ( is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading products are The ProSystem fx® Office, CorpSystem®, CCH® TeamMate, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading global information services and publishing company. The company provides products and services globally for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory sectors. Wolters Kluwer has annual revenues (2007) of €3.4 billion ($4.8 billion), maintains operations in over 33 countries across Europe, North America and Asia Pacific and employs approximately 19,500 people worldwide. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. For more information, visit

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