The 2010 Tax Relief
Act - Is Estate Planning Still Necessary?
The Short answer is yes!
By
now you will have heard a good deal about the Tax
Relief, Unemployment Insurance, and Job Creation Act of
2010 (the 2010 Tax Relief Act or the Act).
The
Tax Relief Act In Summary
The
Tax Relief Act contains a two-year extension of current
income tax rates and other tax relief, a number of
provisions designed to spur business investment,
significant estate tax provisions, and a host of other
tax relief measures. One key takeaway nothing in
this legislation is permanent.
In
this newsletter we will focus on the estate tax relief
provided through the Act.
Surprising
Estate Tax Provisions
The
final provisions of the Act went well beyond most
experts expectations. To briefly summarize the key
elements of estate tax relief:
- Unified
Exemption and
lower rates For 2011 and 2012, the gift tax and
estate tax are unified and an overall $5 million per
person lifetime exemption applies and the marginal
gift and estate tax rate will be 35%.
- Generation
Skipping Transfer Tax (GST)
Exemption also increased to $5 million and the
marginal GST tax rate will be 35% for 2011 and
2012.
- Portability
Any unused exemption of a spouse who dies in 2011 or
2012 can be used by the surviving spouse in addition
to his or her own $5 million exemption.
Previously, any unused exemption was lost.
- Option
for 2010
Allows executors for estates of those who died in 2010
to choose whether to apply the new provisions of the
Act or those effective in 2010, under which no estate
tax was levied, but contained modified carryover cost
basis rules rather than allowing for stepped up cost
basis.
Planning
is Still Important
The
higher lifetime exemption amounts and portability
provisions have led many couples to conclude that estate
planning (or revising existing plans) is no longer
important if their net worth is less than $10
million. We believe that estate planning is as
important as ever. Even if an estate is below the
exemption level, some reasons to have an updated plan in
place include, but are not limited to, the following
considerations:
-
Address
discrepancies between Federal and State Laws (see
explanation below);
-
Ensure
that the needs of intended beneficiaries are
met;
-
Protect
appreciation of assets between the death of the first
spouse and second spouse from being subject to estate
tax;
-
Asset
protection (from creditors, liability or in event a
surviving spouse remarries);
-
Control
(first spouse to die over how his/her share of the
assets will be managed and distributed);
-
Maximize
and preserve GST exemption (portability only applies
to gift/estate tax exemption);
-
Exemption
and portability provisions may change or end.
State
laws
Many of our clients live in New Jersey and New
York. These states continue to levy state estate
taxes. The exemption amounts are $675,000 in NJ and
$1 million in NY and both states have a 16% marginal
estate tax rate. The state exemption amounts are
not portable. If your current estate plan
maximizes the use of your Federal exemption, there may
be a state estate tax imposed upon your death that could
be avoided, reduced or deferred.
Take
Action
Now
is the time to have your estate plan reviewed. Call
your CIS advisor to discuss your specific situation. We
encourage you to see your trust and estate attorney to
ensure that your plan actually delivers on your
intentions without unintended tax consequences.
Sources:
Comprehensive Investment Solutions, LLC; CCH Tax
Briefing
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The Power of
Collaborative Planning
As
tax season comes to an end, its a good time to
highlight the benefits of open communication between
clients and their advisors.
It
is all too common to see a clients financial advisor,
accountant and attorney work in silos, focusing only on
their part of the clients financial picture. This
can lead to unintended consequences and missed
opportunities. At CIS, we encourage open
communication between our clients, ourselves, and their
other advisors. We have proven that our clients
benefit when we collaborate. This benefit has
become one reason new clients seek us out to be their
financial advisor.
Benefits
of a Coordinated Approach to Planning
The
integration of tax planning and investment planning is
one of the areas where ongoing communication between
advisors can benefit clients.
W e
routinely request copies of tax returns from our clients
each year. Reviewing returns allows us to pick up
on any financial changes that we may not have been aware
of, and to take note of gains or losses that may have
occurred outside of our management.
As
the year progresses, through open communication with our
clients and their tax advisors, well be aware of
changes in a clients tax situation, including any
outside losses or gains before
year-end. This can put us in a
position to identify a number of different
opportunities, such as:
- Harvesting
losses in the portfolio to offset gains
elsewhere;
- Taking
advantage of losses elsewhere to realize gains
in the portfolio and thereby reduce future tax
liabilities from the portfolio;
- Suggesting
Roth conversion opportunities that may otherwise not
have been considered;
- Bunching
fees for investment services into the following year
if excess deductions occur during the current
year;
- Making
tactical portfolio changes to maximize tax efficiency
(bond types, locating assets in taxable vs.
tax-deferred accounts, etc.).
Case
Study: Realizing Opportunity from a Significant Tax
Event
Situation: Client
will receive a significant deferred compensation payout
as a result of his firm being taken
private. Taxable income will increase significantly
for this tax year.
Timeframe: As
soon as the client informed CIS about the situation, his
advisor initiated contact with the clients
CPA. Notification from the client was early enough
in the year to consider planning opportunities.
The
clients CIS advisor was aware that the client had
charitable interests and in particular, made sizeable
annual contributions to his alma mater.
After assessing a number of options with the CPA, a
donor advised fund was suggested. A donor advised
fund allowed the client to make a substantial
contribution that represented several years worth of
annual gifts, received the full tax deduction in the
year the contribution was made, and still make the
annual gifts to his alma mater in the amount he had been
accustomed to. This provided him a sizeable
charitable deduction in the year when he benefitted most
from it.
The
CPA quantified the substantial tax deduction that could
be taken for the current tax year. CIS identified
low basis company stock that could be transferred to the
donor advised fund, eliminating the taxable capital
gains that would have been incurred had the stock been
sold from a taxable account. The client was
delighted with this proposal because it met his
objective to reduce current year taxable income,
supported his charitable intentions, removed future
capital gains which he hadnt even considered, and was
easy to implement.
Case
Study: Harnessing a Loss to Support a Roth
Conversion
Situation: Clients
CPA concludes year-end planning. Clients business
will have loss for the year.
Timeframe: Mid-December
2010
Immediately
upon learning that our clients business would realize a
taxable loss, a meeting was convened between their CIS
advisor and their CPA to discuss the situation. The
question being considered was: Given the loss on the
business, would it make sense to convert an IRA to a
Roth IRA? If so, how much should be
converted?
The
client expressed willingness to pay some taxes, provided
that the Roth conversion kept him within the 15% tax
bracket.
Working
with the CPA, CIS devised three conversion scenarios at
different conversion amounts. The first scenario
resulted in no tax cost, the second generated a tax cost
of under $4,000, and the third resulted in a tax cost of
over $6,000.
The
scenarios were presented to the client. He chose
the middle scenario, enabling him to convert $75,000 to
a Roth IRA at an effective Federal tax rate of
5.3%. The conversion was effected prior to
year-end, providing further flexibility for the timing
of the tax payment.
This
opportunity could easily have been overlooked if the
client and his advisors failed to communicate
effectively.
Everyone
Benefits
Our
goal is for every client to enjoy the benefits of having
CIS and their other advisors working together as a
team. Working together in our clients best
interest creates a winning situation for every player on
the team.
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