One Time Estate, Gift, Generation Skipping Tax Planning Window for 2010 for US Citizens and Non Residents May Close Soon; Time to Act is Now

Once in a Life Time Opportunity. Federal tax planners estimate that the total savings to the government in keeping the estate and gift tax regime in place for the next ten years is $1 Trillion. This is a down payment on the $10 trillion plus estimated budget deficit over the next ten years. This budget reality and the gridlock in Congress will mean that the estate tax is coming back in 2011, if not sooner. Since there is no estate tax in 2010 at the present time, this presents a once in a lifetime planning opportunity. We list them by bullet point, but each of them has a complex set of rules which could hurt you if done incorrectly. You should not do any of these except with your tax planning team.

*Make substantial gifts in 2010. You do not use up any estate tax exemptions for gifts in 2010. Check with your financial planner to make sure your do not need the money. Make sure the gift is not bad for the person who receives it. If gifts total over $1,000,000 per taxpayer, there would be a gift tax.
*Gift Tax Lowest. Gift tax in 2010 is 35% on any amount over $1,000.000 and may be as high as 55% in 2011.
*Make outright gifts to financially savvy grandchildren. There is no generation skipping tax on gifts to grandchildren in 2010. Again, there could be a gift tax.
*Make gifts in certain trusts to grandchildren. There are opportunities with carefully crafted trusts to transfer large amounts to grandchildren.
*Plan Basis Allocations. Redo your estate plan to take advantage of the basis increases we discussed in prior blogs.
*Who Gets What. Make sure your existing plan does not disinherit a spouse or child in 2010 because your plan assumes an estate tax as the way to allocate assets between spouse and children.
*Existing Trusts for Grandchildren. For existing trusts where grandchildren are beneficiaries, next year a distribution to them could be subject to a grandchild tax (generation skipping tax (GST)) at a 55% rate. Solution: carefully plan and make distributions this year out of these existing trusts when the distribution will not be subject to a GST tax.
*Basis over Value. If you have property with basis over value, consider passing on that higher basis now to your heirs. Example: Real estate or business interest has gone down in market value to $2,000,000, but your basis is $5,000,000. If you and your spouse gift the asset now, your heirs will have the $5,000,000 basis compared to a $2,000,000 basis if your heirs inherit the property in 2010. The basis on which heirs inherit property when someone passes in 2010 is the lesser of market value and basis.
*Use Tools That May Go Away. There is talk about prohibiting further use of tools to discount value, facilitate use of insurance trusts and other commonly used methods to reduce estate taxes. Use them now before they go away.
*Overseas to US Resident. A non US citizen and non resident may be able to transfer substantial wealth to relatives in the US with no US taxes. Beware of taxes imposed by the country of the non US resident.

What If? What if you make a large estate tax free gift in February, 2010 and in June, 2010, the Congress reinstitutes the estate tax and makes it retroactively effective back to January 1, 2010? From our survey:

1. No one knows what Congress will do. A $3.5 million estate tax exemption bill passed the House in December with no Republican voting for it and has not been acted upon by a Senate Committee. Since 2002, Congress has been unable to pass a new estate tax law. Best Guess: Congress will not be able to agree on what the estate tax should be, will allow the automatic repeal of the Bush tax cuts to take place and the estate tax will automatically go back to a $1,000,000 exemption phased out for the larger estates and a maximum 55% rate.
2. Could Be Retroactive. Congress may pass a bill in 2010 and make it retroactive.
3. Courts May Prohibit Retroactive Law. Most legal commentators are not predicting whether the courts will allow Congress to make the law retroactive. Past cases permitting such retroactive laws may not apply.
4. More Delay, Less Likely To Be Retroactive. The longer Congress waits, the less likely Congress will make it retroactive.
5. Short Window of Opportunity. If the bill is not retroactive, then those who act now will take advantage of a window of opportunity that may last only two to six months.
6. Gifts Can be Undone. There are planning techniques to deal with a retroactive imposition of the estate tax in 2010. These could include formula clauses, disclaimers, powers of appointment, decanting, and Trust Protectors.
7. Plans Have to Be Changed Anyway. Many plans need to be revised due to changes in the family and also changes in the law.
8. Risk and Reward. You have to decide whether the rewards of lower taxes on the transfer of your wealth are worth potential risks.

Act Now While the Law is Favorable Before it Changes. Review your plan now to see if you should take advantage of these short term opportunities.