Gift, Estate, and Retirement Plan Tax Law Changes

Required Minimum Distribution Suspension – President Bush recently signed legislation placing a one year moratorium on required minimum distributions from individual retirement accounts (IRAs) and defined contribution plans, such as 401(k) plans for 2009. We would have preferred a one year moratorium for 2008…with values currently depressed…but Congress and IRS apparently decided the logistical difficulties – and the revenue loss – of implementing a 2008 moratorium were too great.

This relief also applies to clients first turning age 70 1/2 in 2009. Under the new provision, no distribution is required for 2009 and, thus, no minimum distribution is required, for anyone, until calendar year 2010. Persons who reached 70½ in 2008 must still distribute their minimum in 2009 if they haven’t already done so in 2008.

Meanwhile, due to inflation and the passage of time there are also some changes to the estate tax laws in 2009.

Annual Exclusion Gifts – Because of inflation-adjustment, the annual exclusion amount will increase to $13,000 in 2009 from $12,000 in 2008. Consequently, clients can now make present interest gifts of $13,000 per recipient, each year, without paying any gift tax. A married couple can give up to $26,000 per recipient in 2009.

As we noted in our last INSIGHT, it may make sense to give appreciated investments rather than cash to a recipient in a very low income tax bracket because, where the “Kiddie Tax” rules don’t apply, the recipient can sell the investment and may only pay 5% (or even zero) capital gain tax. However, a cash gift is still usually best if you want to maximize the benefits to the recipient.

Clients with young children or grandchildren may be able to give up to $130,000 (for a married couple) in 2009 to fund §529 College Savings Plans. These gifts use the same $13,000 per person, per recipient annual gift tax exclusion but permit a 5-year “bunching” to get to a much greater initial amount.

Lifetime Estate Tax Exclusion (Unified Credit Equivalent) Amount – Under the 2001 Tax Act, the exclusion amount for estate transfers will increase in 2009 to $3,500,000 from $2,000,000 in 2008 (tax-free lifetime gifts are still limited to $1 million of the $3.5 million exclusion). The table below summarizes the remaining implementation of the 2001 Tax Act:

As we’ve remarked in the past, no one really ever expected the 2010 or 2011 situations to actually occur; now, with a new administration and Congress, we believe it very likely that new estate tax legislation later this year will replace those provisions with new arrangements that will be expected to be permanent.

We will, of course, continue to comment on the planning opportunities that may be presented as that legislation takes shape. See Clay Stevens’ article on some of the immediately relevant considerations.