Tennessee Estate Planning Law : Tennessee Estate Planning Lawyer & Attorney : Bryan Howard : Howard & Mobley Law Firm : Nashville, Chattanooga, Memphis

On December 15, 2010, the Senate passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 by a vote of 81-19. The Bill’s fate now rests in the hands of the House of Representatives. If the Bill is enacted as drafted, there are a few transactions that will be treated more favorably if they are completed during 2010.

1. Gifts to grandchildren are treated more favorably in 2010 because you do not have to allocate Generation Skipping Transfer Tax exemption to the gift. However, if you are making a taxable gift and you have already used your $1 million federal gift tax exemption, you should wait until next year when the gift tax exemption increases to $5 million.

2. Transfers to grandchildren from non-exempt trusts are not subject to GST tax in 2010. In general, this is advisable when the trust will be subject to GST tax upon the child’s death and the child has other resources.

3. Gifts to children should be postponed until next year in order to benefit from the increased gift tax exemption (from $1 million to $5 million).

4. Due to income tax rates staying the same in 2011 and 2012, you should evaluate making a Roth IRA conversion in December of 2010 as compared to January of 2011. If you make the conversion this year, you will be able to pay the income taxes from the conversion as follows: 62.5% on April 15, 2012, 12.5% on June 15, 2012, 12.5% on September 15, 2012, and 12.5% on January 15, 2013. You will have the ability to recharacterize the conversion until October 15, 2011. Alternatively, if you make the conversion in January, 2011, you must pay 100% of the tax on April 15, 2012. However, you will have the ability to recharacterize the Roth IRA to a regular IRA until October 15, 2012. As a general rule, the ability to recharacterize the conversion for the longer time period is more valuable than the ability to postpone 37.5% of the tax for a few extra months. Therefore, I am advising my clients to wait until January unless they expect material appreciation of their IRA between now and January.

5. Those of you who are at least 70½ years of age will be able to distribute up to $100,000 of the required minimum distribution from your IRA to charity. You should compare this option with the Synthetic Charitable IRA Gift technique which can be used even if the Bill does not pass or if you are younger than 70½.

The recommendations herein are dependent upon the Bill getting passed substantially in the form approved by the Senate. If the Bill does not get passed in its current form, these planning recommendations will need to be revisited. Stay tuned, and try to keep your options open for last minute planning.
 

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The Senate Finance Committee has released the text of the proposed bill to make various tax changes that were agreed to by President Obama and Republican Congressmen earlier this week.

On the income tax front, the bill would extend all of the so-called “Bush” tax cuts for two years and provide a two year fix for the alternative minimum tax.

There is a one year payroll tax reduction that will reduce the employee’s share of the payroll tax by two percentage points, from 6.2% to 4.2%.

Numerous tax “extenders” will apply for 2010 and 2011. These extenders include the deduction for state and local sales taxes and the charitable IRA rollover of up to $100,000 for individuals who are at least 70½. Apparently, if you fail to make a charitable gift in 2010, you will be able to double up and give up to $200,000 in 2011.

On the estate tax front, estate taxes are reinstated for decedents dying in 2010. However, there is an election for 2010 decedents to be subject to the carryover basis regime rather than the estate tax regime. The estate tax exemption is increased to $5 million per person and the top estate tax rate is capped at 35% for decedents dying in 2010, 2011, and 2012.

The estate tax exemption will be portable between spouses. To the extent the first spouse to die does not use his or her full exemption, it may be used by the surviving spouse if the surviving spouse dies before December 31, 2012 (or if this law is later extended).

The gift tax exemption will increase from $1 million to $5 million for 2011 and 2012 with a maximum rate of 35%. This 2 year increase in the gift tax exemption will create numerous planning opportunities.

GST exemption is increased to $5 million. Gifts to grandchildren in 2010 will not be subject to GST tax. 2010 distributions from non-exempt trusts to grandchildren will not be subject to GST tax. Several of my clients have already taken advantage of this opportunity. Others have been waiting for confirmation of this opportunity from this tax bill.

The overall revenue impact of the bill is estimated to be $860 million over the next three years.

There is uncertainty as to whether the bill will get enacted. Therefore, it would be prudent to wait a week or so before pulling the trigger on a year-end transaction that might be impacted by this bill

I will provide more details about the proposed legislation, especially about year-end planning opportunities, in future articles.
 

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For the last four years, IRA owners who are over age 70.5 have been able to make charitable gifts from their IRA of up to $100,000 per year. This law has been extended before and Congress is currently working on another extension for 2010. Congress’ willingness to continue extending this law is attributable to the popularity of this technique.

Even if Congress extends the law, there may be a better way to make a gift to charity. Here’s how it works: Step 1: Determine how much you want to give to charity from your IRA. Step 2: Make the gift to charity from your non-IRA assets. For example, you could give highly appreciated securities or real estate. Step 3: Convert the same amount of your IRA to a Roth IRA.

The income from the Roth conversion will be offset by the charitable income tax deduction so that the net effect on your income taxes is neutral. Income tax neutrality is consistent with a direct gift to charity from your IRA. However, the synthetic gift has the additional effect of converting appreciated securities from your taxable portfolio into a Roth IRA where you will never pay taxes on the appreciation or the earnings of the securities.

There are 3 other benefits of the synthetic gift technique. You are not limited to a charitable gift of $100,000 per year. You can make a gift to your private foundation or donor advised fund. This is not possible with a direct gift from the IRA.  Finally, if you have not yet attained age 70.5, you are not eligible to make a direct gift from your IRA.  The synthetic gift technique has no age limit.

There is a potential pitfall with this technique. There are complicated income tax rules that affect the timing and amount of your charitable income tax deductions. Make sure your CPA examines the consequences before you make a synthetic charitable IRA gift™.
 

A synthetic charitable IRA gift™ may be a better choice for you than a charitable IRA rollover because it provides money to charity and allows you to convert a portion of your taxable portfolio to a Roth IRA. 

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