Year-End Planning Ideas
Despite the generally low value of many assets today, those low values, combined with low interest rates, the historically low gift tax rate and the repeal of the generation-skipping transfer (“GST”) tax for 2010 make this a terrific time to consider transferring assets to your desired beneficiaries at a greatly reduced tax cost. While each person’s circumstances and interests are different, year-end 2010 provides some great estate planning opportunities. Some of these opportunities include the following:
1. Maximize gift tax exclusions. Congress has yet to enact new estate tax legislation for 2011. Regardless of any pending estate tax reform, however, it is still possible to reduce your estate by making annual gifts to your children and grandchildren before the end of the year. These gifts can be up to $13,000 per donee ($26,000 for married couples), with no limit on the number of donees. In addition, payments of tuition to an educational institution for the benefit of your children or grandchildren are also excluded from gift tax.
2. Take advantage of gift tax exemption amount. For gift tax purposes, there is a maximum gift tax rate of 35% and an exemption of $1,000,000 for 2010. This means that in addition to making annual exclusion gifts, as mentioned above, you can also gift up to $1,000,000 in property to your heirs without incurring any gift tax. By gifting property that has the potential to appreciate in value to your heirs now rather than at death, any future appreciation attributable to the property would be taxable to your heirs and not you when you die.
3. Consider making taxable gifts. Unless Congress enacts new estate tax legislation, the maximum gift tax rate for 2011 will return to 55%, up from the current maximum gift tax rate in 2010 of 35%. Therefore, you might want to consider making additional taxable gifts in 2010 that exceed your $1,000,000 gift tax exemption in order to minimize future gift or estate taxes.
4. Take advantage of depressed economic conditions and low interest rates. Making transfers of property, even if you incur gift tax, is a great estate tax minimization strategy, especially when interest rates are low and property values are depressed. Grantor retained annuity trusts, family limited partnerships, charitable lead trusts and sales to family trusts are just some of the estate planning techniques that you can use to further enhance this opportunity.
5. Maximize gifts to grandchildren. Transfers directly to grandchildren (or great-grandchildren) are currently not subject to GST tax in 2010. Therefore, you may want to consider making gifts to grandchildren (or great-children), as well as children, either outright or in trust, even if it means paying a gift tax.
6. Consider making transfers from trusts that would have been subject to GST tax. Prior to 2010, some distributions from some trusts were subject to GST tax because these distributions were made to skip persons (e.g., a grandchild of the donor). These distributions were referred to as taxable distributions. Taxable distributions required the beneficiary who received the distribution to pay GST tax. Because the GST tax will be restored in 2011, if you previously set up a one of these GST tax exempt trust, you may wish to make distributions to skip persons in 2010 while such distributions are not subject to GST tax.
7. Be careful when making transfers to trusts. Because there will almost certainly be a GST tax in 2011 and beyond, you should carefully consider whether to make transfers to trusts that may have GST tax consequences in the future.
In order to take advantage of any of the above referenced year-end 2010 estate planning opportunities and potentially save significant amounts of tax while preserving assets for your beneficiaries, feel free to contact the Wade Law Offices at (916) 220-7147.