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Year-end estate planning ideas

One of the remaining tax breaks in the estate and gift tax system is your right to make gifts of $12,000 ($24,000 if you are married) to any number of donees free of transfer tax every year. (Note the upward inflation adjustment from last year.) Making these gifts is a great way to reduce your estate and avoid death taxes. Each year that goes by without your making these gifts is a lost opportunity, and a gift to Uncle Sam. Use it by the end of December – or lose it!!

The new laws that were enacted in 2001 decreased the top estate tax rate modestly over the next 10 years and also increased the estate tax exemption over the same period. However, under present law, the old 55% top rate and the $1 million exemption will return with a vengeance at the end of the decade. Given this tax structure, many clients conclude that it makes sense to continue their gifting program at this time.

So, with the gift tax still intact, and the estate tax returning to full force in 2011, this annual gifting opportunity is a tremendous tax break. For example, a taxpayer and spouse with three children (each with a spouse) and three grandchildren can make annual tax-free gifts of $216,000 (9 persons at $24,000 each). Assuming that a 55% estate tax rate will apply, that can mean future tax savings of almost $109,000 — per year. Missing this chance could mean that those tax savings will evaporate, and all those tax dollars will wind up with the IRS, and not with your family, at your death.

Also, the gift tax exemption remains at $1 million. The sooner you use it, the more income and appreciation can pass tax-free to your family in the future.

Not comfortable making outright gifts of $12,000 or of your $1 million exemption to your loved ones? Put the gifts in a Crummey Trust (a.k.a. a Gift Trust) instead. A Crummey Trust can be designed so that you can take advantage of your annual gifts and still leave your family with access and control. Crummey Trusts, named after the landmark case in this area, provide that each designated beneficiary has a right to withdraw his or her $12,000 (or $24,000 if you are married) share of the gift during a specified period of time (e.g., 30 days). Once the period ends, the withdrawal right lapses and the gift is subject to the terms of the trust. If your family needs access to the trust funds, the trust income and assets are available — if the family does not need them, let them grow and remain sheltered. If you already have a Crummey Trust, have you notified your beneficiaries that they have limited rights of withdrawal? This is essential to qualify these gifts for the annual exclusion.

If you have a family business or real estate, these assets can be gifted instead of cash or publicly traded securities. In many cases, these assets can be used for gifting in ways that avoid giving away access or control. What could be better than controlling the business or realty, retaining your cash and saving estate and gift taxes to boot?

If you have a family limited partnership, year end is a perfect time to hold your annual partners’ meeting and update your annual partnership minutes. Remember, the IRS will not respect your partnership, unless you do.

Florida Intangibles Tax
The Florida Intangibles Tax was repealed during 2006. Therefore, if you are a Florida resident, you no longer need to worry about availing yourself of the “safe-harbor” provisions established by the Florida Department of Revenue to avoid the Florida Intangibles Tax. The FLITE Trust has flown!

New Charitable Giving Options for IRA Owners
If you are at least 70½ years old, the Pension Protection Act of 2006 (Act), permits qualifying charitable distributions of up to $100,000 per year from individual retirement accounts (IRAs) to be donated tax-free directly to certain charities, provided that the distributions are made prior to 2008.

Effective for tax years after December 31, 2005, the Act permits taxpayers with IRAs to donate “qualifying charitable distributions” from IRAs. To be a qualified charitable distribution, the distribution must be an otherwise taxable distribution from a taxpayer’s traditional IRA or Roth IRA that is made directly to a qualified exempt public charity and that is made on or after the date on which the taxpayer attains age 70½. A taxpayer can arrange for more than one qualified charitable distribution per taxable year, limited to a total of $100,000 per year.

The exclusion does not apply to distributions from simplified employee pensions or from simple IRAs. Also, the exclusion does not apply to any donations to private foundations, supporting organizations or donor-advised funds. The exclusion only applies to distributions made in taxable years beginning prior to January 1, 2008.

This provision in the Act creates many new gift opportunities. Please contact us if you have any questions.

New partnership tax law in Kentucky
Effective July 12, 2006, Kentucky adopted sweeping new partnership laws. One such new law is the creation of the limited liability limited partnership (LLLP), which is a limited partnership that has made an election to afford its general partners limited liability protection from the debts and obligations of the partnership. The election to be treated as an LLLP is made in the certificate of limited partnership, or, in the alternative, in an amendment to the existing certificate. Thereafter, subject to some specific notice provisions for pre-existing limited partnerships, the general partners enjoy limited liability protection. There are also special rules regarding the name of an LLLP, but for all other purposes an LLLP operates as any other limited partnership. To the extent an individual is currently serving as the general partner of a Kentucky limited partnership or for individuals contemplating the formation of a limited partnership, it would be extremely advisable to consider using the LLLP form of partnership. Please contact us if you would like to discuss conversion of your existing limited partnership to an LLLP or if you are interested in forming an LLLP.

Conversion of Traditional IRA to Roth IRA
Income limits will be eliminated in 2010 for converting a traditional IRA to a Roth IRA. You may want to begin making non-deductible contributions to a Traditional IRA now which you can later convert to a Roth IRA.

Have you been putting off updating your estate plan?
Year-end is the perfect time to reflect back over the past year. Make sure that those estate planning matters that you resolved to address in your 2006 New Year’s resolutions do not become your 2007 New Year’s resolutions. Perhaps you have had a change in your family situation, health or wealth during the past year that impacts your estate plan. Maybe you want to ascertain the impact of the ever-changing estate and inheritance tax laws on your existing estate plan. Whatever the reason, year-end is the ideal time to make good on your resolution.

With these matters out of the way, you are then set to enjoy the holidays!

  • Partner

    John is Chair of the firm's Estate Planning Department. He also leads the firm's Senior Partner Committee, and is a member of the firm's Finance Committee. John, a former Certified Public Accountant, began his career in the tax ...



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