In 2001, the administration of President George W. Bush passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA for short). This law made gradual changes to the federal estate tax exemption, federal lifetime gift tax exemption, and federal generation skipping transfer tax exemption and their respective tax rates over a ten year period. Below is a summary of the changes to the exemptions and rates that were in effect from January 1, 2009 through December 31, 2009.
2009 Changes to Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws
In 2008 the estate tax exemption was $2 million and the top rate was 45%, the lifetime gift tax exemption was $1 million and the top rate was 45%, and the generation skipping transfer tax exemption was $2 million and the top rate was 45%. Some these numbers changed in 2009, while others did not:
- New and more favorable estate tax and generation skipping transfer tax exemptions went into effect. In 2009, the federal estate tax exemption increased to $3.5 million and the estate tax rate for estates valued over this amount remained at 45%. The generation skipping transfer tax exemption also increased to $3.5 million and the top tax rate remained at 45%. On the other hand, the lifetime gift tax exemption remained at $1 million and the maximum gift tax rate remained at 45%.
- AB Trust planning was required for married couples. In 2011, the concept of "portability" of the estate tax exemption between married couples was introduced, which effectively allows married couples to pass on two times the federal estate tax exemption without any complicated estate planning. (Nonetheless, note that even if the deceased spouse's estate is not taxable, the surviving spouse would still be required to file IRS Form 706, United States United States Estate (and Generation-Skipping Transfer) Tax Return, in order to make the election to take advantage of the deceased spouse's unused estate tax exemption.) Not so in 2009 and prior years - back then married couples could only pass on up to two times the federal estate tax exemption by including "AB Trust planning" in their estate plan. In addition, AB Trust planning or ABC Trust planning was also required for married couples who resided in certain states - see more on this below.
- Married couples had to deal with the estate tax exemption gap in certain states. In 2009, 18 states and the District of Columbia collected estate taxes at the state level. In the majority of these states, there was a significant gap between the federal estate tax exemption of $3.5 million and the state estate tax exemption. For example, in the District of Columbia, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon and Tennessee, the state estate tax exemption was only $1 million, so in these states estate planning was tricky because the wills and trusts of residents, as well as nonresidents who own real estate in these states, needed to take into consideration the estate tax gap of $2.5 million between the federal and state exemptions. In some of these states ABC Trust planning was required to defer the payment of both state estate taxes and federal estate taxes until after the death of the surviving spouse.