October 29, 2010
Dear Clients and Friends:
As most of you know, to the surprise of most taxpayers and estate planning professionals, Congress adjourned in 2009 without passing needed transfer tax legislation and has failed to address these matters thus far in 2010. While this development has created a great deal of uncertainty and confusion for taxpayers this year, it has also created some unique planning opportunities as we approach the end of 2010.
Transfer Tax Rates and Exemption Amounts
In 2001, legislation was enacted that set escalating estate and generation-skipping transfer (“GST”) tax exemptions, coupled with decreasing tax rates. In 2009, the estate and GST exemptions stood at $3.5 million per person (or $7 million for a married couple), with a 45% tax rate on transfers exceeding the applicable tax-free exemption.
As of January 1, 2010, the estate tax and GST tax were effectively repealed for one year, only to revert on January 1, 2011, to an estate tax exemption of $1 million per person (or $2 million for a married couple), a GST exemption of approximately $1.36 million ($1 million adjusted for inflation) and a maximum tax rate of 55%.
Unlike the estate and GST taxes, the federal gift tax remains in effect for 2010, with an exemption of $1 million and a 35% maximum rate. The maximum tax rate for taxable gifts in 2009 was 45%, and the rate increases to 55% in 2011.
Planning Options for the Remainder of 2010
For high net worth individuals who are contemplating very large taxable gifts (i.e., in excess of the $1 million per individual lifetime gift tax exemption), now may be an ideal time to make such a gift due to the lower gift tax rate. In addition, outright gifts to adult grandchildren may also enjoy special treatment this year because of the temporary repeal of the GST tax. Due to the application of the GST tax in future years, it is questionable whether gifts to grandchildren in trust (which would typically be preferred) would receive such favorable GST tax treatment.
To the extent you (or your children) are beneficiaries of an existing GST non-exempt trust, it may also be possible to accelerate distributions to capitalize on the 2010 suspension of the GST tax. Please keep in mind that this technique is not appropriate for all GST non-exempt trusts and will require an individual analysis to determine its suitability.
Historically low interest rates and the currently scheduled increase in income tax rates for 2011 also create other planning opportunities, such as intrafamily loans and Roth IRA conversions. There is also ongoing speculation that Congress may constrain or eliminate certain sophisticated tax planning structures, such as grantor retained annuity trusts (GRATs) and family limited partnerships (FLPs), so time may be limited to take advantage of these techniques.
Summary
Various members of Congress have proposed legislation or suggested changes to the law that would dramatically change the exemptions and tax rates described above, even potentially extending to retroactive reinstatement of the estate and GST tax for 2010 and adjustment of the 35% gift tax rate. Thus, while the current climate of uncertainty with respect to the transfer tax laws makes estate planning more challenging than ever before, we hope in this letter to have made you aware of some unique and time sensitive opportunities. If any of these are of interest to you, please contact us as soon as possible. We intend to update our website with future estate, GST, gift and other tax developments. In the future, you should view our website at www.fizerbeck.com for periodic updates.
As the tax laws become clearer, either by action or continued inaction of Congress, clients should contact their estate planning attorney or other advisors to determine whether changes to their estate plan are advisable. Whether you are an active client or if we are not currently engaged with respect to your estate planning matters, we will be glad to undertake such a review upon your request. The fees for any review and revisions will be charged on an hourly rate basis.
Finally, we are attempting to compile an updated email database of all our clients. To that end, we would appreciate if you would contact our receptionist Janice Palmer, at jpalmer@fizerbeck.com, with your current name(s), address, telephone numbers and preferred email addresses.
Please feel free to contact us with any questions or if we may be of assistance to you.
Sincerely,
FIZER, BECK, WEBSTER, BENTLEY & SCROGGINS, P.C
NOTICE PURSUANT TO TREASURY CIRCULAR 230 REGARDING USE OF WRITTEN TAX ADVICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of: (i) avoiding penalties under the Internal Revenue Code, as amended or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s].