Your Estate Plan: Ideas You Can Really Use
Is there Change in the Air?
Where is Congress Going with Tax Reform?
Earl H. Cohen, Attorney at Law
The election season is in full swing. This election, both for the White House and Congress, will be one of the most important seen in decades. What happens with tax reform will largely depend on who is elected president and which party gains control of Congress. Major tax reform in 2001 and 2003 left several tax issues with an uncertain future including income, capital gains, social security and, of course, estate tax. Although I can't claim any special insight into the results of the election on November 4th, conservative planning requires that we assume that Senator Obama wins the presidency and the Democrats gain solid control of Congress.
As a matter of background, several important provisions of existing law expire (or sunset) in the coming months. The federal estate tax is repealed on December 31, 2009 for 12 months only to come back with a $1 million exemption on January 1, 2011. The continuing war and lingering deficits will likely force consideration of changes in other taxes. While it may be politically expedient to talk about reducing taxes, the country's infrastructure, continuing economic struggles and the financial challenges facing Social Security and Medicare will likely necessitate increases in federal revenues. How might these potential changes affect planning now and in the months before Congress introduces new tax legislation?
Capital Gains Tax. The federal tax on the sale of both tangible and intangible property is likely to rise beyond the current 15 percent rate to 20 or even 28 percent. It would be wise for everyone to carefully examine their stock, bond and real estate portfolios and determine if it makes sense to sell certain parts of their portfolio to take advantage of this year's capital gains rates. This strategy also holds true for owners of businesses who have been considering a sale. Sellers of real estate or business interests who may be thinking about a sale on an installment basis should consider electing out of installment treatment declaring the gains under the contract in the year of sale, locking in this year's capital gains rates.
The Tax on Corporate Dividends. Dividends paid by C, or regular corporations are currently taxed at 15 percent rather than ordinary income tax rates. C Corporations holding significant amounts of cash have the opportunity to declare and pay "qualified dividends" to their shareholders before year end at the current rate.
Social Security Tax. Social Security (FICA) is payable this year on the first $102,000 of earned income. There seems to be support in Congress to develop an exposure range or bubble with the first $102,000 subject to tax and also making all amounts over $250,000 subject to tax. Owners of businesses who personally earn over $250,000 and whose business is organized as a partnership, Limited Liability Company (LLC) or C (or regular) corporation may be wise to consider reorganizing their company into a Sub S corporation. Owners may then be able to limit their salary to $250,000 and take additional amounts as Sub S distributions. Such distributions, while subject to Medicare tax, would not then be subject to FICA.
Federal and State Estate Tax. Both presidential candidates indicate that the federal estate tax is not likely to be repealed. That said, the current estate tax exemption is set to increase from its current $2 million to $3.5 in 2009. Many believe that Congress will then increase the exemption over the next several years to between $4 million and $5 million. Rates are likely to be reduced slightly to 40 percent. The Minnesota estate tax also continues to be an important planning concern. The exemption is currently $1 million and is not likely to be increased in the short term. Clients whose estates could predictably exceed either the federal or state exemption are well advised to get and keep their estate plans up to date. That planning should focus on strategies to:
- Legitimately reduce your estate for estate tax purposes using:
- o Direct gifting to family members and charities of tangible and intangible assets.
- o Irrevocable trusts to own life insurance.
- o Gifting of incremental interests in real estate and business interests at discounted values.
- Properly use both the federal and state estate tax exemptions.
- Effect a "zero" or "minimum" estate tax result.
- Manage and distribute assets from your estate in a tax efficient manner accounting for income, capital gains and estate tax.
There may be other changes coming including the elimination of "step-up in basis" at death with the imposition of "carry-over basis." As with any tax or estate planning it is important to seek the advice of your professional advisor. Please feel free to contact the estate and wealth transfer planning professionals of our firm to discuss your plan.
