Wealth Transfer Newsletter

Wealth Transfer Team
Wealth Transfer Newsletter - December 2009
The Latest on Estate Tax Legislation          Planning Opportunities with IRAs


As we rapidly approach the end of 2009, we wanted to take this opportunity to wish you a very happy holiday season and also share with you the latest in legislative updates as they pertain to the federal estate, gift and generation skipping transfer (GST) taxes.  As we have previously communicated to you through our Newsletter updates, the estate and GST taxes have been set to be repealed as of January 1, 2010 and common wisdom has been that Congress would act to prevent the repeal before the expiration of 2009.  However, with all attention on health care reform, the estate tax has taken a back seat  . . . although, likely only temporarily.  Therefore, inside this Newsletter we bring you additional information and thoughts on the possibility of repeal of the estate tax.  Lastly, we highlight other information pertinent to year-end tax planning for your consideration.  Please do not hesitate to contact the members of our Team with any questions regarding these important matters.

We hope that you and your families have a prosperous and healthy New Year.

Neill McBryde


The Latest on Estate Tax Legislation

As we have previously reported, thus far in 2009 Congress has considered a number of proposed Bills regarding the estate, gift and GST taxes – of which the estate and GST taxes are set to be repealed effective January 1, 2010.  One of the first Bills introduced this year by Representative Pomeroy, referred to as H.R. 4154 – Permanent Estate Tax Relief for Families, Farmers, And Small Businesses Act of 2009 (the “Act”) – was passed by the House of Representatives on December 3rd.  Under the Act, the estate tax would be retained with a maximum rate of 45%.  Further, the estate tax exemption would be set at $3.5 million per taxpayer and the gift tax exemption would be fixed at $1 million per taxpayer.  Unlike some of the other proposed Bills, the Act does not provide for the “portability” of the estate tax exemption between spouses, nor does it address valuation discounts as used in estate and gift appraisals for certain entities.  However, it is possible that Treasury will address the valuation discount through the promulgation of Regulations if it is not otherwise addressed through the passage of legislation.   

Of the numerous Bills introduced, the Act is the only one to have been passed by either branch of Congress.  However, with year-end rapidly approaching and Congressional attention set firmly on health care reform, it is highly unlikely either the Act or other legislation affecting the estate tax will be passed and signed into law by President Obama prior to December 31st.

Effect of Estate and GST Tax Repeal

Assuming the Act or other legislation is not passed prior to December 31st, the estate and GST taxes will be repealed as of January 1, 2010, but only for one-year.  In the event that legislation is not passed in 2010 to retain the estate and GST taxes, the impact for those affected by the repeal would be considerable.  While the estate and GST taxes are scheduled to be repealed for 2010, the gift tax is retained, although at a maximum tax rate of 35% (as opposed to the current rate of 45%). 

Moreover, the estate’s of those dying in 2010 would not be subject to estate or GST taxes, the basis “step up” to fair market value at the decedent’s date of death afforded under current law for assets inherited also disappears.  The carry-over basis rules applicable to gifts thus would apply to inherited assets, as well, with only a limited step up allocation available ($1.3 million for assets passing to other than a surviving spouse and an additional $3 million to assets passing in a qualified form to a surviving spouse).  Further, it is unclear how an estate would be divided as between a surviving spouse and the traditional by-pass or credit shelter trust used in estate planning funding language, which language generally is based on definitions of “estate tax exemption or credit” and “estate taxes”, none of which would be applicable in a year of repeal.  If the result leaves assets outright to a surviving spouse or any other beneficiary, such assets could be subject to estate tax in the estate of the surviving spouse or beneficiary as the estate tax, under current law, is set to return in 2011 with a maximum tax rate of 55% (not including the additional 5% surcharge tax for estate’s in excess of $10 million) and an estate tax exemption of only $1 million.  Thus, it may be prudent to evaluate existing documents to determine if adjustments should be made to address the possibility of repeal and the appropriate and desired disposition of assets if such a possibility becomes reality.

Impact of Retroactive Reinstatement of the Estate and GST Taxes

Any “repeal” of the estate and GST tax could be temporary and such taxes may be reinstated retroactively through appropriate legislation as retroactive changes in tax law are likely not subject to constitutional challenges so long as enacted prior to the filing deadline of any tax return affected by such legislation.  Thus, undertaking any transfers that might result in a taxable gift should carefully be considered, as well as any transfers that would otherwise trigger the GST tax, as law could be passed during 2010 (likely by September 2010, the filing deadline for estate tax returns of decedent’s who died in January 2010) that would reinstate the estate and GST taxes and retain the maximum 45% gift tax rate effective as of January 1, 2010.  Finally, we continue to believe, as do many other commentators that any legislation, including retroactive legislation, also will likely address valuation discounts for non-operating business entities, as well as the use of grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs) in gift tax planning.

What To Do

For those concerned that Congress may not reinstate the estate tax, or reinstate it without retroactive effect, you should review your estate planning documents and execute amendments, as appropriate, to address the disposition of your estate under such circumstances.  Most estate plans include dispositive provisions that are based primarily on the utilization of the estate tax exemption and other tax provisions, which if not in effect, may make the resulting dispositive provisions ineffective or operate in an unintended manner.  Further, certain dispositions, such as outright distributions to a surviving spouse, may have future negative consequences assuming the estate tax is reinstated and such assets are includible in the estate of a surviving spouse.  Therefore, you should consider promptly executing an amendment to current documents to address these concerns and to take advantage of tax efficiencies that may be afforded if a temporary repeal of the estate and GST taxes comes to pass.

The members of the Wealth Transfer Team are available to assist in any manner during this period of legislative uncertainty.  Please contact any member of the Team to discuss these matters as they relate to you and your estate plan.

Planning Opportunities with IRAs

Through December 31, 2009, a taxpayer over the age of 70 ½ may make a qualified charitable distribution from his or her IRA.  A qualified charitable distribution is not included in the taxpayer’s adjusted gross income, however a charitable deduction is not received from the distribution.  The exclusion of the distribution from the taxpayer’s gross income will yield a larger tax benefit than inclusion and a charitable deduction, so interested taxpayer’s should take advantage of this planning opportunity before it expires.  A qualified charitable distribution is a distribution that (1) does not exceed $100,000, (2) is made directly to a charity from the trustee of the IRA, (3) is made from a traditional or Roth IRA, and (4) is made to a public charity (not a private foundation, donor advised fund or supporting organization).  For married taxpayers, this provision applies to each spouse so that qualified married taxpayers may make qualified charitable distributions of up to $200,000.  Interested taxpayers should note the expiration date of this provision and be sure to process the distribution prior to December 31, 2009.

Additionally, we have previously advised you of the ability to convert a traditional IRA to a Roth IRA and the expansion of the eligibility rules for such conversions effective January 1, 2010.  There has been much interest in this planning opportunity and we wanted to highlight some advantages that have been discussed.  First, assuming that the conversion is done prior to any legislation that increases income tax rates, it may be possible to “lock in” a lower effective tax rate on the amount converted.  Next, by converting a portion of an IRA to a Roth, a taxpayer has “diversified” their IRA assets by providing the opportunity to take distributions from a Roth IRA, which is not subject to income tax, in order to minimize income taxes in a given tax year.  Additionally, the required minimum distribution rules do not apply to Roth IRAs.  Finally, for taxpayers with potentially taxable estates (in excess of the applicable estate tax exemption amount, assuming the estate tax is reinstated) comprised of significant IRAs, conversion of a traditional IRA to a Roth may provide an opportunity to reduce estate taxes (by payment of the income tax liability resulting from the conversion), as well as providing the taxpayer’s heirs with the benefit of having paid the income taxes on an asset that otherwise would be subject to income taxes on withdrawal by the heirs.



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