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Top Estate Tax Planning Ideas for the End of 2010

Attorney guest blogger Jeramie J. Fortenberry writes how, despite uncertainty over future estate taxes, there are a few planning techniques that can help taxpayers take advantage of the 2010 estate tax cuts before they expire.

If you are interested in estate planning and have been half conscious this year, you’ve probably heard about the 2010 estate tax predicament. Here’s a quick breakdown of how taxpayers are affected by the current estate tax laws:

  • Taxpayers who died in 2009 could leave $3.5 million to their heirs free of estate tax. For income tax purposes, any property passing to heirs at death received a basis step-up. (A basis step-up is a taxpayer-friendly adjustment that erases all appreciation in the property.)
  • The estates of taxpayers who die in 2010 are not subject to estate tax since the estate tax has been temporarily repealed. But property left to heirs at death generally does not get a basis step up for income tax purposes, with two exceptions: (1) a basis increase of up to $1.3 million ($60,000 for non-resident non-citizens) can be allocated among appreciated assets and (2) property left to a surviving spouse can qualify for a $3 million basis step-up.
  • Taxpayers who die in 2011 could pay estate tax on all assets over $1 million at tax rates of up to 55 percent. But for income tax purposes, assets received from a decedent will once again get a full basis step up.

If this weren’t enough of a planning nightmare, many commentators believe Congress will soon raise the amount that can be left to heirs free of tax. Several “estate tax fixes” have been introduced that, if enacted, would provide much-needed relief to taxpayers with estates in excess of $1 million. For example, a proposal by Senators Blanch Lincoln (D-Ark.) and Jon Kyl (R-Az.) would allow taxpayers to leave $5 million to heirs free of tax and would fix the top tax rate at 35 percent. This proposal has received bipartisan support, but whether it or another like it will ever make it into the Internal Revenue Code is anyone’s guess.

And let’s not forget about the possibility of permanent estate tax repeal. With the recent elections on November 4, some believe that Congress has the right makeup to permanently do away with the death tax.

So what’s a taxpayer to do in this state of flux? Here are a few planning techniques to consider as we enter into this final quarter of 2010:

  1. Give, give, give. As in prior years, taxpayers can still give up to $13,000 per person ($26,000 for a married couple) to any number of people without worrying about the gift tax. Gifts in excess of that amount could be subject to gift tax, but gift tax rates for 2010 only go up to 35 percent. That amount is scheduled to increase to 55 percent in 2011. So if a taxpayer is thinking of making large gifts to family members, now may be the time.
  2. Make Generation-Skipping Transfers. The 2010 estate tax repeal also repealed a lesser known tax called the generation-skipping transfer (GST) tax. The GST tax is imposed on gifts to family members that are more than one generation below the gift-giver (typically, gifts to grandchildren). The GST tax will return with the estate tax in 2011, potentially subjecting gifts in excess of $1.34 million to both estate taxes and gift taxes. Some taxpayers are taking advantage of the current GST tax break to make gifts to grandchildren.
  3. Consider GRATs. Grantor retained annuity trusts (GRATs) are irrevocable trusts designed to take advantage of disparities between rates of return assumed by the IRS and the actual rates of return that an asset can produce. GRATs are particularly attractive in a low-interest-rate environment, but there are some indications that Congress may soon curb the use of GRATs for estate planning purposes. Some taxpayers are setting up GRATs now before it’s too late.

The most important thing that taxpayers can do: get advice from a qualified tax planner before it’s too late. 2010 is almost gone!

Jeramie J. Fortenberry is an attorney with Fortenberry Law Group, an estate planning and probate law firm with offices in Florida, Mississippi, and Alabama. He assists clients with wealth preservation strategies and sophisticated estate planning. Read more from Jeramie J. Fortenberry at his estate planning and probate blog.

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