Looking back on a year that has been perhaps the most unusual in her 30 years of counseling wealthy clients in the area of trusts and estates, Gail Cohen, vice chairman and general
trust counsel at Fiduciary Trust Company International, has some pointed year-end advice.
Most of it applies to clients with estates of more than $1 million, whose exclusion may well be limited to that amount should Congress allow current tax laws to expire Dec. 31.
This year brought the long-awaited phaseout of the estate tax — a windfall for families of millionaires and particularly the beneficiaries of the five billionaires whose timely demise did their heirs a major financial favor at the very real expense of the U.S. government.
However, clients who are healthy and wealthy might be wise to consider the following strategies:
The gift tax. Now at 35%, the tax on gifts that exceed a taxpayer's lifetime million-dollar exclusion is scheduled to rise to 55% next year. “Making gifts that reduce the size of a large estate provides a great strategy to manage overall tax liability,” Ms. Cohen explained. This year, she pointed out, it will cost $1.35 million to make a $1 million gift over the exclusion. Next year, the cost will be $1.55 million.
Generation-skipping transfer tax. The elimination of this tax in 2010 makes giving outright to grandchildren (or other remote descendants) “incredibly tax effective,” Ms. Cohen said. “But the [transfer tax] could spring back to life next year, so if something is put in trust for [grandchildren] this year, it's possible that it will generate GST tax in subsequent years.”
Roth conversions. Converting to a Roth individual retirement account has to be looked at on an individual basis, Ms. Cohen said. “It's hard to let tax concerns drive any decisions, but we've found that it's a nice strategy for those who don't need the IRA money to live on and can afford to pay the taxes,” she said. If they meet those criteria, they'll be leaving their heirs a tax-free vehicle, Ms. Cohen said.
Disclaiming inheritance. If your client is inheriting this year and doesn't need the assets, you might propose that he or she make a qualified disclaimer to the next generation so that the assets will pass with no estate, gift or GST tax, Ms. Cohen suggested.
“This is a particularly good year for a spouse to disclaim [in favor of children],” she noted, “because otherwise the assets would be subject to estate tax when the spouse dies in a subsequent year.” The disclaimer must be filed within nine months of a death this year — even if that period extends into 2011 — and the assets can be passed on only to a named beneficiary.
