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Recent Changes to Federal Tax Law Have Significant Impact on Estate Planning

January 2009

Several important changes in the federal tax law came into effect on January 1, 2009. If your estate plan has not been reviewed or updated recently, please be aware of how these changes may impact your planning goals.

Estate Tax Exemptions

One major change is that the federal estate tax exemption (the amount which may be passed tax-free upon death) increased from $2,000,000 to $3,500,000. This means that fewer estates will be required to file a Federal Estate Tax Return (Form 706) or pay any federal estate tax.

If your existing Will bequeaths an amount equal to the full federal exemption to a trust for the benefit of your surviving spouse, with the balance of the estate passing outright to your spouse, then your entire estate may fund the trust, leaving nothing for your spouse to receive outright. The same result could occur if your Will bequeaths the exemption amount to your children and/or grandchildren: there may now be no balance for your spouse.

Another consideration is that the New Jersey estate tax exemption remains at $675,000. This means that the cost of using the full federal exemption on the death of the first spouse has more than doubled from $99,600 (the New Jersey estate tax on the difference between $2,000,000 and $675,000) to $229,200 (the tax on the difference between $3,500,000 and $675,000). Thus, if you have a Will that provides for the funding of the full federal exemption, you should consider having your Will reviewed and potentially updated.

Although the federal estate tax is scheduled to be repealed in 2010 and reinstated in 2011 with an exemption amount of only $1,000,000, Congress seems likely to act in the first half of 2009 to address this problem. It appears that President Obama's estate tax plan includes eliminating repeal, setting the exemption at $3,500,000 (indexed for inflation after 2010), and retaining the current top estate tax rate of 45%. Another important element of the proposed plan is a new concept called "portability," i.e., making a deceased spouse's unused federal exemption available to the surviving spouse. We will be monitoring this situation closely and will advise you when legislation is enacted.

Inflation Adjustments

Some additional federal tax amounts have now been adjusted for inflation. These are:

-The annual gift tax exclusion, i.e., the amount which may be gifted tax-free, has increased from $12,000 to $13,000.

-The first $133,000 of gifts to a noncitizen spouse are non-taxable (this increased from $128,000).

-In cases where federal estate tax is being paid in installments, the amount used to determine the portion subject to a two-percent interest rate has increased from $1,280,000 to $1,330,000.


Individual Retirement Accounts

There have also been two significant changes relating to individual retirement accounts (IRAs). First, as part of the banking bailout legislation (the Emergency Economic Stabilization Act of 2008), there is a two-year extension of the IRA charitable rollover provisions that were originally part of the Pension Protection Act of 2006. If you are at least 70 1/2, you can make a taxfree charitable rollover from your IRA, as long as the amount does not exceed $100,000. The transfer must be made from an IRA (not a 401(k) or other retirement plan) directly to a public charity (not a donor-advised fund or private foundation) and cannot be used to fund a charitable gift annuity or charitable remainder trust.

Second, the Worker, Retiree and Employer Recovery Act of 2008 suspended the required minimum distribution (RMD) rules for 2009. If you have reached age 70 1/2 and would otherwise be required to take an RMD, you are not required to do so for 2009 (note, however, that 2008 RMDs must still be taken). The law applies to all IRAs and 401(k), 403(b) and 457 plans, as well as inherited IRAs and estates withdrawing funds under the five-year rule, but does not include defined benefit plans or annuities.

This is good news if you are the owner of an IRA or other covered plan and you do not need to take a distribution to cover your living expenses in 2009. Those funds can now be left in the IRA or plan and the recognition of ordinary income tax can be deferred. Depending on your own tax situation, however, it may make sense to make some withdrawals even though you are not required to do so, such as if you anticipate being in a lower tax bracket in 2009 than in future years (either because of expected additional income or possible rate increases needed to generate revenue). Another reason to take an RMD in 2009 is if you are eligible, you could convert the distribution to a Roth IRA, which is not normally allowed; although income tax would be owed, you would move the withdrawn funds into a vehicle on which future earnings would be tax-free. Note that starting in 2010, the $100,000 adjusted gross income limitation for Roth IRAs will no longer apply, so more people will be eligible for Roth conversions.

FDIC Insurance

Lastly, in light of the economic turmoil, the Emergency Economic Stabilization Act also temporarily increased the amount of insurance coverage available from the Federal Deposit Insurance Corporation (FDIC) for bank accounts. Coverage was increased from $100,000 to $250,000 per depositor. Note, however, that this increase is only effective through this year, after which coverage will return to $100,000.

For more information, please contact: David L. Schlossberg at (973) 530-2010 or via e-mail at:; Sean M. Aylward at (973) 530-2105 or via e-mail at:; Stephen L. Ferszt at (973) 530-2020 or via e-mail at:; Roxanna E. Hammett at (973) 530-2039 or via e-mail at:; Carl B. Levy at (973) 530-2035 or via e-mail at:; Myrna Blume at (973) 530-2062 or via e-mail at: and Shannon L. Keim at (973) 530-2084 or via e-mail at:


This Client Alert should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own lawyer concerning your specific situation or any legal questions you may have.