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Before 2011, Get Ready for Changes in Estate Tax Law

PLAN FOR ESTATE TAX CHANGES BEFORE THE NEW YEAR

As things currently stand, with less than a month to go in the 2010 tax year, the federal estate tax and generation skipping transfer tax are temporarily repealed by Congress.  However, on January 1, 2011, the federal estate tax and generation skipping transfer tax will be reinstated as they existed in 2001 with a $1,000,000 credit shelter exemption and a marginal effective rate of 41% increasing incrementally to 55% for estates in excess of $3,000,000. If Congress allows this to happen, many people who thought that they were free from estate tax concerns will need to rethink their arrangements to minimize the estate tax impact.  I recommend you set up an appointment with your attorney now to review your current arrangements.

GIVE ANY TAX FREE CASH GIFTS BEFORE THE NEW YEAR

You can reduce your estate by making annual (and sizable) cash gifts to any children, grandchildren or great-grandchildren. Even if major changes happen with estate taxes in 2011, annual gifting remains a cornerstone of good estate planning for 2010. Currently, you can give up to $13,000 to an unlimited number of people, with no tax consequences whatsoever. If you’re married, you and your spouse can each give $13,000 as gifts to your heirs or others, so that’s $26,000 per recipient. All the money you give will be removed from your estate.

MAKE YOUR TAX FREE COLLEGE TUITION AND MEDICAL EXPENSE GIFTS

In addition to the annual giving exclusion, you can make gifts to pay college tuition so long as payments are made directly to the educational institution.  You can also make gifts for payment of medical expenses for your children and grandchildren without gift tax impact.

MAKE YOUR TAX FREE”LIFETIME” GIFTS UP TO $1 MILLION

You can also consider making larger gifts using the $1,000,000 per person gift tax exclusion.  Although lifetime gifts may reduce the estate tax credit shelter exemption available when you die, there may be an advantage to transferring assets which are likely to increase in value in the future.  This strategy may be particularly helpful given the relatively depressed financial and real estate markets.  But remember that for lifetime gifts your beneficiary takes over your “cost basis” in the asset and may be subject to capital gains tax if the asset is sold.

Gifts in excess of $1,000,000 will generate a gift tax at a marginal rate of 35% but event taxable gifts may be advantageous given the higher rates that will apply if the property is held until death and becomes subject to estate tax.  Gift tax rates are scheduled to increase in 2011 to 55%.  And gifts in excess of $1,000,000 may generate an unnecessary current tax if Congress does decide to increase the estate tax credit shelter exemption so caution would need to be exercised in making large gifts.

Because there is no “generation skipping transfer” (GST) tax in effect this year, making substantial gifts to grandchildren and other remote descendants is a particularly attractive strategy this year end.  The GST tax is scheduled to be reinstated next year with a $1,340,000 exclusion (Originally $1,000,000 adjusted for inflation).

ACT NOW–BEFORE THE NEW YEAR!

Time is running out for 2010 transactions so you will want to contact your advisors as soon as possible to complete transactions by year end.