The 2009 Estate Tax Roller Coaster


The risk-adverse world of estate planning has been flipped on its head. For the next two years, married couples with sizable estates should brace for a wild ride. Starting in 2009, the estate tax exemption equivalent (exemption) is now $3.5 million per person ($7.0 million for a married couple).

In 2008, the exemption was $2.0 million per person. In 2010, estate taxes disappear only to resurface in 2011 with the exemption diving to $1.0 million per person, unless Congress intervenes.

What is going on here?

Traditional Analysis

Traditionally, estate planners grappled with exemptions that sheltered only a fraction of the estate tax liability. Maximizing the exemptions for husband and wife was the key objective.

Generally, couples were concerned with the following: (i) minimizing estate taxes; (ii) leaving the maximum amount to the surviving spouse; and (iii) providing for the children or grandchildren after the death of the surviving spouse.

2009 Change

With a combined $7.0 million exemption, the focus shifts from minimizing estates taxes to maximizing the amount left to the surviving spouse estate-tax free ($3.5 million in 2009).

Note: Those with estates over $7.0 the traditional approach – maximizing each individual’s exemption – continues as the primary concern.


Assume husband and wife’s estate is $4.0 million, owned equally, and they have their full exemptions. If husband dies in 2008, his share of the assets ($2.0 million) is covered by his $2.0 million exemption. The same is true for wife; thus, there is no estate tax liability.

Now assume that husband dies in 2009. His $3.5 million exemption is $1.5 million greater than his $2.0 million share. If husband does not transfer additional assets to wife, her exemption will be underfunded by $1.5 million.

Under the new exemption amount, husband may transfer an additional $1.5 million to wife without adverse estate tax consequences.

Note: Under both examples, if in the future wife’s estate increases above her exemption, her estate may owe taxes on the difference.

New Approach

Given this new reality, the combined exemptions may greatly exceed the estate’s value. Allocations based on the estate’s size and the surviving spouse’s exemption are now the primary focus.

Maximum funding of the deceased spouse’s exemption may result is less than optimum planning and, potentially, an angry surviving spouse who was deprived of a larger share of the couple’s estate.


With the increase in exemptions, estate planning is undergoing radical change. Although there is no estate tax in 2010, the betting crowd wagers that Congress will settle on a future exemption between $2.5 and $3.5 million.

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