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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 up to $12,000 to any number of donees ($24,000 per donee if you are married) free of transfer tax this year. These amounts will increase in 2009 to $13,000 per donee ($26,000 per donee if you are married). 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 – and again in January – or lose it!! 


Federal laws that were enacted in 2001 have decreased the top estate tax rate modestly and also increased the federal estate tax exemption through 2010. Under those laws, the federal estate tax exemption will increase to $3.5 million on January 1, 2009, but will apply only for deaths occurring in 2009. It is very likely that Congress will undertake a review of the estate tax laws in 2009, especially given the results of the election. As such, the much anticipated “free year” with federal estate taxes that is set to begin on January 1, 2010, may never come to pass. Stay tuned for more to come as Congress tackles this issue. 

Barring any action by Congress, under present law the old 55% top rate and the $1 million estate and gift tax exemption will return with a vengeance on January 1, 2011. Given this roller coaster estate 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 this year (9 persons at $24,000 each). Assuming that a 55% estate tax rate will apply, that can mean future tax savings of almost $119,000 this year alone. Next year, the tax free amount will increase to $234,000, and the savings will increase to approximately $129,000. Missing this annual chance could mean that those tax savings will evaporate, and all those funds will wind up with the IRS, not with your family, at your death. 

Also, the federal 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 large outright gifts 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 exclusion 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 this year 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 could be available — if the family does not need them, let them grow and remain sheltered. If you already have a Crummey Trust, have you made your gifts this year? Also, have 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? 

The recent market downturn has made it all the more attractive to gift marketable securities or other assets now. The reduced asset values allow you to effectively make larger gifts than you could previously make. Hence, when the markets begin their upturn, the gifted assets will be appreciating outside of your estate, but will still be accessible to your spouse. How is that for making lemonade out of lemons? 

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. 

Two-year extension of charitable giving options for IRA owners 

The Emergency Economic Stabilization Act of 2008 provides an annual exclusion from gross income of up to $100,000 for taxpayers age 70½ or older who make otherwise taxable individual retirement account (IRA) qualified charitable distributions during 2008 and 2009. An identical provision in a prior law expired at the end of 2007. 

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,” but is limited to a total of $100,000 for each of 2008 and 2009. For married individuals filing a joint return, the limit is $100,000 per spouse each year. 

Such distributions are not subject to the charitable contribution percentage limits, since they are neither included in gross income nor claimed as a deduction on the taxpayer’s return. Because such a distribution is not includible in gross income, it doesn’t increase adjusted gross income (AGI) for purposes of the phaseout of itemized deductions, personal exemptions or any other deduction, exclusion or tax credit that is limited or lost completely when AGI reaches certain specified levels. An excluded distribution cannot be deducted as a charitable contribution. 

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. This is a federal income tax exclusion only. Few states grant the same exclusion. 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 then later convert to a Roth IRA, potentially yielding income tax benefits.

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 2008 New Year’s resolutions do not become your 2009 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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