Estate Tax Update: Planning in the Midst of Chaos

1:28 pm Uncategorized

What everyone has discovered this Columbus Day is that the American tax code is still a chaotic mess.  Congress is adjourned until after the elections and the Big Bite that is the 2011 estate tax continues to loom ominously on the horizon.

So what’s a planner to do?  A article gives some insights into what you can do now and what you can get ready to do in December:

What to Do Now:

Contribute the maximum to your 401(k) – that’s $16,500, or $21,500 if you will reach the age of 50 by December 31, 2010.

Sell bonds. If you have any corporate bonds that expire next year, sell them in 2010 and book the long-term capital gain.  This will convert next year’s interest income (taxed at 35 or 39.6 percent) into this year’s capital gains (taxed at 15 percent).

Give money to children and/or grandchildren. There’s no gift tax on gifts of $13,000 or less, so if you’re married, you can give up to $26,000 to a child or grandchild.  If that child is married, you can give twice that — $52,000 – to the (now happier) couple.

Set up GRATs (grantor retained annuity trusts).  You can read our previous blog on the advantage of setting up GRATs for the reasons why.

Get Ready to Do:

Taxable gifts. For those who have already used up the $1 million lifetime gift tax exemption, think about making taxable gifts this year, especially to grandchildren since the generation-skipping tax skipped 2010.

ID large deductions, but don’t take them yet. Identify those big deductions that can be paid before year-end to take advantage of lower 2010 rates, but don’t take them yet until you know whether or not that will be the case.

Identify income to accelerate. Look for ordinary income you could accelerate into 2010, like bonuses or deferred compensation.

Roth IRA Switch-up – 2010 is the first time anyone can take money from a pretax IRA, pay tax on it and deposit it into a Roth IRA, where it can grow tax-free.  If you do a Roth conversion now, you have until a year from now – Oct. 15, 2011 – to either undo it or decide if you want to pay taxes on the conversion on your 2010 return or split the income between your 2011 and 2012 returns.

Get started by contacting our Orange County asset protection estate planning law firm as soon as possible.

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