Year-end Tax Thoughts: Estate Planning

BY MARY E. VANDENACK

“In this world nothing can be said to be certain but death and taxes.” – Benjamin Franklin

In fact, however…

as of the date of this article, in the area of estate planning and the federal estate tax for 2010, uncertainty reigns supreme.

Under the present estate tax regime, the federal government imposes an estate tax on your taxable estate up the highest marginal tax rate of 45%. While the amount that can be transferred without being subjected to the federal estate tax is $3.5 million in 2009, there is much uncertainty about whether the exemption will remain that high in the future. In addition, other aspects of the current system are likely to change. However, despite the uncertainty, there are a few tools that should be considered for use prior to the end of 2009 in order to reduce the size of your estate.

Use present interest annual gift tax exclusions

The annual gift tax exclusioon is an amount that mayb e given each year by a donor to donee without estate or gift tax. Each donor has a $13,000 annual exclusion for gift tax liablity. That is, you may give up to $13,000 to a child, a niece, nephew or other donee without paying any estate or git tax. In addition, the annnual exclusion is $26,000 per donee for a married couple. While a gift of cash, a bond, or a publicly traded stock can be used to make a gift, a gift of a family partnership or limited liability company offers the opportunity for levereaged use of the annual exclusion.

Medical and educational expenses

If you are paying certain medical expenses and educational expenses for a donee and pay such amounts directly to the institution or provider, payment of such expenses is not treated as a taxable gift. As a result, it is possible to make a $13,000 gift to a donee and, in addition, pay certain medical and educational expenses on their behalf, also free from the federal gift tax.

Consider use of lifetime gift tax exemption

Above, I referred to the $3.5 million exemption from federal estate taxes. The federal government allows you to make up to $1 million of such transfer during your life. The advantage of doing so is that you transfer future appreciation to your heirs currently. The long term growth on the asset transferred will escape estate tax. In addition, current law allows donors to apply various discounts to assets owned by LLCs, partnerships and certain other closely-held businesses. For example, you might own an LLC with real estate worth $5,000,000. Because the LLC interests that you transfer to your desired recipients lack marketability and may represent minority interests, you can discount the value fo the interest transferred. That is, an entity with assets worth $5,000,000 isn’t itself worth $5,000,000 if there is not market for the the LLC interests or there is an inability to control distributions and other decisions fo the LLC.

2009 is a good year to consider using discounts to the extent a donor has appropriate assets. Serious consideration is being given by Congress to legislatively eliminate the discounts.

In general, if a donor is comfortable with his or her overall asset base, 2009 is a good year to consider gifting assets to heirs at a time when such assets may be worth less than a year or so ago.

metroMAGAZINE, November 2009