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New Tax Provisions

Trusts & Estates Update John T. Bannen, Kristin A. Occhetti

With the start of a new year, most taxpayers tend to focus upon the previous year's financial activity, preparing for the eventual day of reckoning in April. However, there have been a number of developments in the tax codes affecting 2009 and the next few years to come, of which conscientious taxpayers should be aware.

Required Minimum Distributions: Holiday for 2009

Those nearing or past retirement age should take careful note of new tax implications with regard to their retirement accounts. Ordinarily, the Internal Revenue Code imposes, on individuals who have reached age 70½, a required minimum distribution ("RMD") to be taken from retirement plans, including traditional IRAs, 401(k)s and 403(b)s. If the RMD is not taken by December 31 each year after the individual reaches that age, he or she will be subject to a heavy 50% excise tax on the shortfall, in addition to the ordinary income tax on the distribution. (Roth IRAs are exempt from the age 70½ RMD rules.)

However, on December 23, 2008, President Bush signed into law the Worker, Retiree and Employer Act ("the Pension Act"), which suspends the required minimum distribution rules for 2009. The purpose of the suspension is to allow retirement plan owners to recoup some of the losses they have suffered due to the recent stock market plummet. Therefore, while you would otherwise be required to take a RMD for 2009, you are no longer required to do so until 2010. This relief applies to not only those who have contributed to the retirement plans but also to those designated beneficiaries who inherited the plans (including Roth IRAs), who are also subject to the RMD rules.

Please note that the suspension of the RMD under the Pension Act does not affect the required beginning date that applies after an individual reaches age 70½, for purposes of determining the RMD attributable to 2008. For example, if an individual turned 70½ in 2008, his or her first RMD could be taken as late as April 1, 2009. The taxpayer would still be required to take his or her first RMD attributable to 2008 by April 1, 2009 but would not be required to take the otherwise-required RMD attributable to 2009. Unless the suspension is extended by further legislation, the requirement to take RMDs will resume in 2010.

Rule Allowing Tax-Free Charitable Distributions from IRAs Extended Through 2009

On October 3, 2008, President Bush signed into law an extension of the tax-free treatment of qualified charitable distributions from traditional and Roth IRAs (but only the taxable portion of a Roth IRA) until December 31, 2009. IRA owners who are at least 70½ years old are allowed to make distributions of up to $100,000 in a calendar year directly to qualified charitable organizations or private foundations, without recognizing federal income tax and without taking a charitable deduction. Contributions to donor-advised funds, supporting charitable organizations or charitable trusts are not eligible. The distribution must be made directly to the eligible charitable organization by the IRA trustee, and the taxpayer/donor cannot receive value in return from the charitable organization. If the donor receives value in return, the tax exemption is lost for the entire amount distributed. To this end, the charitable organization must provide written verification of the contribution and that the donor received no value in return.

While the IRS permits the distribution to be counted as all or a portion of the taxpayer's required minimum distribution, this provision has no practical effect in 2009 since required minimum distributions have been waived for 2009. The tax savings opportunity is available only until December 31, 2009.

Federal Estate Tax Exemption Increases for 2009

As of 2009, the last scheduled increase in the federal estate tax exemption, which is part of the Bush tax cuts, has taken effect. The exemption now permits the passage, upon death, of $3.5 million to non-spousal beneficiaries. While the estate tax is scheduled to be repealed entirely for one year in 2010, most experts believe that Congress will pass legislation this year to prevent the repeal of the federal estate tax and instead enact a permanent exemption of $3.5 Million. In fact, this legislation has already been introduced in the House of Representatives and we are monitoring it closely.

Increase in Federal Annual Gift Tax Exemption for 2009

For gifts made in 2009, the federal annual exclusion for gifts has increased to $13,000 per person. Thus, for example, a married couple acting jointly can give up to $26,000 per year to each child, each grandchild and their spouses. Making gifts in January of each year allows the gifted property to earn interest and potentially appreciate in the hands of the donee, and thus produces additional estate tax savings for those donors whose estates are still subject to the federal estate tax.

No Wisconsin Estate Tax

For more than a year now, Wisconsin has had no separate state estate tax. Quietly, Wisconsin has joined estate tax havens such as Florida and Texas. Whether the estate tax-free environment in Wisconsin can continue, in light of the state's projected deficit, remains to be seen. Governor Doyle has stated that tax increases are on the table in terms of solving Wisconsin's financial dilemma. This could include a resumption of the Wisconsin estate tax.

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This alert is intended as a general summary of legal matters and not as specific advice to any particular client. If you have any questions concerning the subject matter of this update, please contact John Bannen at 414-277-5859 /, Kristin Occhetti 414-277-3075 /, or your local Quarles & Brady attorney.