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Year End estate planning ideas

Gift program

One of the remaining tax breaks in the estate and gift tax system is your right to make gifts of $12,000 to any number of donees ($24,000 apiece if you are married) free of transfer tax every year. (Note the amounts will remain unchanged for 2008.) 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 have decreased the top estate tax rate modestly and also increased the federal estate tax exemption through 2010. 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 adult 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 of those funds will wind up with the Internal Revenue Service (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 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 your family does not need them, let them grow and remain sheltered. If you already have a Crummey Trust, have you made your gifts yet this year? Also, 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 property, 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 property, 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.

New charitable giving options for IRA owners

If you are at least 70½ years old, the Pension Protection Act of 2006 (Act), permits annual qualifying charitable distributions of up to $100,000 from individual retirement accounts (IRAs) to be donated tax-free directly to certain charities.

The Act permits taxpayers with IRAs to donate “qualifying charitable distributions” from IRAs only through December 31, 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 2007.

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 provision in the Act creates many new gift opportunities, but it is set to expire at the end of this year Please contact your estate planner or tax counsel if you have any questions.

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 will 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 2007 New Year’s resolutions do not become your 2008 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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