2008 Year-End Estate Planning Advisory

In 2008 there were many developments?legislative,

regulatory, case law and economic?that affect estate

planning and related areas on the national, local and international

levels. The Trusts and Estates Practice at Katten Muchin Rosenman

LLP is pleased to provide you with a summary of some of the most

significant developments and expected future developments in this

critical election year, along with recommendations for you to

consider for year-end.

Federal Estate, Gift and Generation-Skipping Transfer Tax

Exemptions

The estate tax exemption, called the "applicable exclusion

amount," will increase from $2 million to $3.5 million per

person in 2009?the single biggest increase ever. In 2010,

under current law, the estate tax is to be repealed?so

that you may leave an unlimited amount to anyone free from estate

tax. In 2011, the estate tax is scheduled to return, with only a $1

million applicable exclusion amount. It is widely expected that the

law will have changed before the 2010 repeal.

The generation-skipping transfer ("GST") tax

exemption, which tracks the increase in the estate tax applicable

exclusion amount, will therefore also increase to $3.5 million in

2009. In 2010, the GST tax exemption will be unlimited. In 2011,

the GST tax exemption is to return to $1 million, with an annual

inflation adjustment.

The amount of lifetime gifts that may be made free from gift tax

using the gift tax applicable exclusion amount (above and beyond

the Annual Gift Tax Exclusion) remains frozen at $1 million. Even

in 2010, when there is no estate tax, the gift tax applicable

exclusion amount will stay at $1 million.

Federal Estate, GST Tax Rates

The top Federal estate tax and GST tax rates will remain at 45%

for 2009. As stated above, current law calls for the estate tax and

GST tax to be repealed in 2010, for that year only. In 2011, the

estate tax and GST tax are to return, with a top rate for each of

55%. As noted, it is expected that Congress and the new

administration will make changes that will eliminate the one-year

repeal.

The top gift tax rate also remains at 45% for 2009. However,

while the estate tax and GST tax are scheduled to be repealed, the

gift tax will remain in place in 2010, with any gifts beyond the

applicable exclusion amount and Annual Gift Tax Exclusion amounts

subject to tax at the top individual income tax rate, which is

currently 35%. However, in 2011, the top gift tax rate will return

to 55%, like the estate tax and GST tax rate.

Annual Gift Tax Exclusion

Each year individuals are entitled to make gifts of the

"Annual Gift Tax Exclusion Amount" without incurring gift

tax or using any of their lifetime applicable exclusion amount

against estate and gift tax.The amount of the annual gift tax

exclusion is adjusted for inflation and will increase from $12,000

to $13,000 per donee in 2009.Thus, a husband and wife together will

be able to gift $26,000 to each donee.

The amount of the Annual Gift Tax Exclusion with respect to

gifts made to non-citizen spouses is also adjusted for inflation

and will increase to $133,000 in 2009.

A Look into the Crystal Ball: What Will Happen to the Estate,

Gift and GST Tax?

Congress tried many times over the past several years to repeal

the estate tax permanently, but to no avail. In addition, there

have been proposals to increase the applicable exclusion

amount.

During his campaign, President-elect Obama proposed an

applicable exclusion amount of $3.5 million with a top tax rate of

45% (which if passed would mean, for example, that married couples

with properly planned estates could pass $7 million to their

children, or anyone else, without incurring estate tax).

The inclusion of a "portability provision" has also

been proposed. This would allow a surviving spouse to use both his

or her own applicable exclusion amount, plus the deceased

spouse's exemption to double the applicable exclusion amount

available for use at the surviving spouse's death. This would

be a significant change from current law, where, absent proper

estate planning, any unused exemption of the first spouse to die is

lost.

Additional FDIC Protection for Bank Deposits

2008 was a year of unprecedented economic turbulence. In

response to concerns about the safety of bank deposits, in October

2008 the federal government announced that the Federal Deposit

Insurance Corporation ("FDIC") limits on bank accounts

were temporarily increased from $100,000 to $250,000 for each

individual's total deposits at a banking institution. The

increase is effective through December 31, 2009.

Emergency Economic Stabilization Act of 2008 (the "EES

Act")

In further response to economic difficulties, on October 3,

2008, President Bush signed the EES Act into law. The following is

a summary of a number of the key tax provisions of the Act:

Mortgage Debt Relief Extended. Generally, when

a debt is cancelled, the amount cancelled must be included in gross

income. Mortgage debt that is cancelled or written down was an

exception to the general rule, but the exception only applied

through 2009. The EES Act extended this relief through 2012.

Cost Basis Reporting for Brokerage Accounts.

The EES Act requires mutual funds and brokers to provide cost basis

reporting with respect to sold or redeemed fund shares acquired on

or after January 1, 2012. In addition, financial companies will

need to specify whether gains are short-term or long-term.

Financial companies will be required to provide this information to

taxpayers by February 15 of each year, instead of the usual January

31 deadline.

AMT Patch. The EES Act temporarily increases

the AMT exemption amounts for 2008 (Married filing

jointly? $69,950; single and head of

household?$46,200; married filing

separately?$34,975).

Deduction for Tuition and Fees. The Act

extends through 2009 the tuition and fees deduction (which is worth

up to $4,000, depending on adjusted gross income).

Charitable IRA Rollover. The EES Act extends

through 2009 the IRA charitable rollover. This provision allows

individuals who have attained age 70 ½ to contribute up to

$100,000 directly from their IRA to a public charity (i.e., not a

private foundation or a donor-advised fund), and this amount will

not be included in gross income but will count toward the

individual's required minimum distribution for the year.

Because this amount will not be included in income, no charitable

deduction will be allowed.

Return Preparer Penalties. The Small Business

and Work Opportunity Tax Act of 2007 altered the standards of

conduct that must be met to avoid imposition of the Section 6694(a)

penalty for preparing a return which reflects an understatement of

liability. Prior to the 2007 Act, the standard of conduct for

undisclosed positions required to avoid a penalty was a

"nonfrivolous standard." The 2007 Act raised the standard

of conduct for undisclosed positions to "more likely than

not" (i.e., at least 51%). One of the issues with this raising

of the standard of conduct is that the standard of conduct that

taxpayers themselves were subject to was a "substantial

authority standard" (i.e., 40% or more). Thus, there was an

inherent conflict of interest between the taxpayer and the tax

return preparer. The EES Act altered the return preparers'

standard of conduct so that it now mirrors the taxpayers'

standard of conduct for undisclosed positions (i.e., the

"substantial authority standard" or 40% or more).

Planning in an Uncertain Economy

The economic challenges that faced the nation in 2008 created

much stock market fluctuation, and interest rates reached historic

lows. While these changes have been unsettling, they created unique

estate planning opportunities which will continue into 2009. The

lower interest rates fall and the more stock prices sink, the

better the environment to transfer assets with little or no gift or

estate tax consequences, because a number of techniques turn on

assets outperforming IRS assumed rates of return. For example, if

the IRS assumes that an asset will earn a return of 3.4% and you

have assets that are significantly depressed in value, you may

transfer the "spread" between the 3.4% assumed rate of

return and the actual future increase in value to your children or

others with minimal or no gift or estate tax cost. There are a

number of estate planning techniques which become significantly

more valuable as stock prices and interest rates dip further:

charitable lead annuity trusts, private annuities, sales to

"defective" grantor trusts and grantor retained annuity

trusts ("GRATs"). Two of the most frequently used

techniques are summarized below.

GRATs

A GRAT provides you with a fixed annual amount (the

"annuity") from the trust for a term of years (as short

as two years). The annuity you retain may be equal to 100% of the

amount you use to fund the GRAT, plus the IRS-assumed rate of

return applicable to GRATs (which for gifts made in December 2008

is 3.4%).

Because you will retain the full value of the GRAT assets,

according to the IRS's assumptions, assuming you survive the

annuity term, at the end of the annuity term the value of the GRAT

assets in excess of your retained annuity amount will pass to

whomever you have named with no gift or estate tax, either outright

or in further trust.

Sales to "Defective" Grantor Trusts

Another option for transferring assets without any transfer tax

is an installment sale to a "defective" grantor trust (a

trust of which you would be responsible for the income taxes

payable on the income generated by the assets therein, but which is

not included in your taxable estate upon your death).

You would sell assets likely to appreciate in value to the trust

in exchange for a commercially reasonable down payment and a

promissory note for the balance. From an income tax perspective, no

taxable gain would be recognized on the sale of the property to the

trust because the trust is a defective grantor trust, which makes

this essentially a sale to yourself. For...