Trust and Estate Counsel

Tennessee Estate Planning Law

Insight and commentary on estate planning issues impacting affluent residents of Tennessee

Year End Planning in Light of Pending Tax Bill

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.