Sunday, November 21, 2010

Year End Planning

Many clients have contacted me and asked about the most effective planning methods and techniques during this year where the "regular" estate, gift, and generation skipping tax rules will go back in effect next year (more on that below). With regard to each person's unique situation, different planning techniques may provide you or them with some extra benefit if done before the end of the year. In general, those include large lifetime gifts (as the tax rate on gifts over the million dollar lifetime gift credit) is 35% in this year, but reverts back to a maximum rate of 55% next year without any congressional action. Based on this, if you are a client who has been thinking about making large gifts and who does not mind paying gift taxes, then this is the year to make outright, large gifts. These types of gifts can be made to trusts as well, but based on the rules regarding generation skipping taxes, I am not recommending that you make large gifts to trusts that have beneficiaries who would trigger generation skipping taxes. The reason for this is that even though there is no GST tax this year, the GST tax will be assessed against distributions from trusts in the future if the gift that funded the trust was not exempt from this type of tax. Due to this change in the law that will occur on January 1, 2010, I am suggesting to clients that if they want to make large gifts to grandchildren or more remote heirs to avoid the GST tax in the future (and to take advantage of the lower gift tax rate this year), then the gifts should be outright. If the trust is set up to benefit the children of the Donor, then the large taxable gift can be made to a trust for that person's benefit, but the trust must be set up to be included in that beneficiary's estate if you do not want it to be subject to GST taxes in the future.

In general, planning techniques involving charitable gifting (outright gifts to charities, creation and funding of private foundations, public charities, etc.) all must be done before the end of the calendar year instead of the tax due date of April 15th next year. Based on this, if you are working with your CPA to determine if you need additional charitable deductions for this tax year, make sure that you work with your attorney to provide enough time to make these gifts prior to the end of the year. Even the formation of private foundations can be done prior to year end as they can be formed and funded (giving you the tax deduction) if the entity obtains its 501(c)(3) status within a close period of time of the formation of the entity (you must generally file the 1023 form within 27 months of formation if you want the operations of the entity to be tax exempt from the date of formation).

In addition to all of the above, Congress is going to modify the GRAT rules sometime next year, so if you would benefit from a two year GRAT, then that may be another planning technique to consider. Life Insurance is also another great option that people sometimes consider too late (based on developing health issues). The earlier you get a life insurance plan in place, the better your costs will be (and you will often be able to get more coverage).

If you have questions about what any of the above means, do not hesitate to contact me by phone or email and we can discuss your questions in greater detail.

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