“How the New $3.5 Million Exemption Amount Affects Your Estate Planning” (Part 1)

Published in the Hokubei Mainichi, Aug. 28, 2009
by LAURIE SHIGEKUNI

I’d like to highlight some good estate planning news for readers of the Hokubei who own homes and savings.

The federal estate tax exemption amount increased from $2 million to $3.5 million on Jan. 1, 2009. That is, the estates of people who die in 2009 leaving less than $3.5 million in assets will not owe federal taxes unless the deceased persons made large gifts during their lifetimes.

Furthermore, the exemption amount may stay at $3.5 million for the long term. The exemption amount has been increasing on a schedule begun in 2002. The schedule calls for the tax to disappear entirely during 2010, then drop to $1 million unless Congress acts.
Congress does appear likely to do something soon, though we can’t know exactly what.

President Obama has supported proposals to keep the exemption amount at $3.5 million.
Some recent proposals are less favorable to extremely large estates, and the $3.5 million cap has actually been attacked as too restrictive, but it would be good news for people who have up to about $5 million in savings.

For example, consider a single person with a $2.5 million estate. If that person died
last year, $500,000 would have been subject to federal and state estate taxes. If the person passed away this year, the same estate would not owe any estate tax.

This tax news may affect you even if you own a lot less than $3.5 million, by making it safer for you to relax certain restrictive provisions that were commonly written into trusts several years ago.

The trust you have now may have been written with a lower exemption amount in mind — for example, only $600,000, or not much more. It may provide that, upon the first death of a spouse, assets beyond about $600,000 are to be separated off in ways that could reduce the surviving spouse’s control over them.

Now that the tax laws have become more generous, most trusts for married people can be rewritten more simply. In many cases these new trusts do not place restrictions on the surviving spouse’s use of assets and will be much easier for the surviving spouse to manage.

This especially matters for married couples with both spouses still living, because they can still change their trusts. Once one member of a couple dies, it’s usually too late for the survivor to change a trust document’s most important provisions.

If you would like to receive e-mails about the status of the exemption amount and other estate planning issues, please feel free to call our office at (415) 584-4550 or (800) 417-5250, and ask to be added to our e-mail list.