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Your Estate Plan
Year-End Planning Wrap-Up

As year-end approaches, I’m reminded of the rule around our house: we don’t leave on vacation or any other travel until an annual update of our estate plan and our year-end tax planning is complete. With all the demands for year-end transactions and other planning necessary for our clients, completing our personal plan becomes a tall order in December. As I have been working on those year-end plans I’ve had the opportunity to examine what has changed on the federal and state levels that will affect our clients’ plans. Here’s a short summary of some important changes.

FEDERAL ESTATE TAX-WHAT TO EXPECT

In 2001 Congress passed sweeping tax reform that included significant changes to the estate tax. The legislation increased the estate tax exemption to $3.5 million for each estate in 2009 and the elimination of the credit for state estate tax. The legislation also repealed the estate tax and converted the “step-up” in basis rules to “carry-over” basis. The step-up in basis rule provides that the tax basis for assets that are part of a taxable estate “step-up” in value to the current market value on the death of the owner. This has the result of eliminating tax, at the time of sale, on the gain between the original cost (with some adjustments) of the asset and its value at the date of death. The “carry-over” basis rules would effectively leave the beneficiaries the same basis as the owner and the asset would still be taxed, for estate tax purposes, at the asset’s market value at the date of death. On December 3, the House, by a vote of 225 to 200, approved H.R. 4154, the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009.” The bill would make permanent the present law for estate, gift, and generation skipping transfers in effect for 2009. The Senate has yet to act, but it would appear that we will either have a permanent change for the estate and gift tax or at least an extension of the current law by year-end. Under the House-passed bill, the effective exemption amount for estate tax purposes would be $3.5 million for decedents dying during 2010 and later years and the effective exemption amount for gift tax purposes would remain at $1 million for 2010 and later years. The highest estate and gift tax rate would be 45%, a reduction from the current 50% and the law retains the step-up in basis rules. We will, of course, have to wait for the final bill to be signed by the President, but this legislation should provide some greater certainty when planning an estate.

OTHER FEDERAL TAX MATTERS

Other federal tax matters include:

• Direct Charitable Gifts from IRAs: Congress extended through December 31 of 2009 the rule allowing direct charitable contributions from an IRA without first taking the withdrawal. The actual gift must be completed by December 31st. It’s likely, but not guaranteed, that this rule will be extended again.
• Roth IRA Conversions: Conversions of Traditional IRAs to Roth IRAs without regard to the owner’s income will now be allowed BEGINNING January 1, 2010. The conversion will still trigger income tax on the amount converted. The analysis can be very complicated and should include a full retirement income analysis taking into account social security, expected earned income and other factors. If you’re considering converting you traditional IRA to a Roth, the analysis should be completed early in 2010 to gain the best advantage.

MINNESOTA LAW MATTERS

• Use of Disclaimers in Planning: Disclaimers have become more useful in estate planning with the changes effected this year in Minnesota. A "disclaimer" is a written instrument that declines, refuses, releases, or disclaims an interest by a beneficiary in real or personal property either by gift or inheritance. However, coordination with a professional advisor is still important for use of disclaimers in both estate and income tax planning.

• Probate Avoidance for Very Small Estates: We have had the ability to avoid probate on very small estates where the value of the probate estate (those assets titled in the name of the decedent) did not exceed $20,000 through the use of an Affidavit of Collection. Now, such affidavits can be used where the value of the entire probate estate, determined as of the date of death, less liens and encumbrances, does not exceed $50,000. There are, however, special rules and procedures that must be followed. This new higher dollar limit will help many families avoid significant delay in freeing up a deceased loved one’s assets.

For further information on these and other estate and tax planning issues please feel free to call Earl H. Cohen or Jeffrey C. O’Brien at 800-4016-194.