Estate and Tax Planning for 2010 & 2011

As you may have heard, the federal estate tax rules changed radically in 2010 and could change radically again in 2011 unless Congress passes new legislation. This is intended to inform you of what has happened and things to condsider as you make estate planning decisions.

2001 Tax Act
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which provided for significant phased-in increases in the federal estate, gift and generation skipping tax (GST) exemptions and lower tax rates. EGTRRA provisions included:


• In 2009, the estate and GST exemptions increased to $3.5 million per decedent, with a flat 45% estate and GST tax rate on any excess. The gift tax exemption was $1.0 million, with tax rates from 41% to 45%.


• In 2010, the federal estate and GST taxes were repealed for one year. The gift tax $1.0 million exemption remained, with a lower flat tax rate of 35%. Thus, you had to die or pay gift tax to get the benefit of the change. The step up in basis rules (which gave a “fresh-start” fair market basis for most assets of a decedent) was replaced with an adjusted carry-over basis. These new basis rules permit a step up in basis of up to $1.3 million, plus an additional $3.0 million for certain spousal transfers at death.


• On January 1, 2011, EGTRRA was automatically repealed, resulting in an odd situation: A $3.5 million estate and GST exemption and flat 45% tax rate in 2009, no estate and GST tax in 2010, and a $1.0 million estate exemption and tax rate up to 60% in 2011.


What Happened in 2009?
Estate planning practitioners universally expected Congress to carry the 2009 estate tax rules across 2010 (both Representative Rangel as Chair of the House Ways and Means and Senator Baucus as Chair of the Senate Finance Committee said it would happen earlier last fall). However, unexpectedly in December the House failed to act on a one year extension and instead sent the Senate a bill to make the 2009 rules permanent. Because the Senate was focused on health care and there was broad disagreement in the Senate on what to do with estate taxes, Congress enacted no changes to the EGTRRA’s 2010 rules. Thus, effective as of January 1, 2010, there is no federal estate or GST tax.


Planning in Chaos.
Congress’s failure to adopt estate tax legislation in 2009 and the possibility that changes will not be adopted during 2010, radically change the estate planning considerations of many clients. For example, Congress has indicated that in 2010 about 6,000 decedents will benefit from the elimination of estate taxes, but over 70,000 heirs will pay higher income taxes because of the change in the income tax basis rules for assets received from decedents.


2010 Changes. The U.S. has an unpredictable planning environment in which any number of radically different changes may occur in 2010:
• Congress may do nothing in 2010, in which case there is an adjusted carryover basis, and no federal estate or generation skipping tax for people who die in 2010. While you probably will not die in 2010, you still need to consider planning for that possibility, because not planning for these changes, if death occurs, can be disastrous.
• Congress may adopt legislation to carry the 2009 rules over 2010, retroactive to January 1, 2010. There is broad disagreement on whether a retroactive tax bill is constitutional. If a retroactive law it adopted, it will be challenged as unconstitutional and it could take years for the Supreme Court to rule on the issue. Until such a ruling, uncertainty will prevail. Those dying after the enactment should not have that uncertainty. In any event, your estate plan should contemplate dying both before or after a potential retroactive enactment, which may or may not be constitutional.

Make 2010 the Best Year Ever

Now is the time to organize and make some changes to your tax routine. Here are a few ideas:

1. Review and adjust your withholding.
   If you receive a big tax refund for 2009, resolve to file a new Form W-4 to adjust your withholding and reduce your refund to a reasonable size. It’s comforting to receive a small refund, but remember that a refund means you’re making an interest-free loan to the government — money you could be investing or using to your own benefit.
2. Maximize your tax-advantaged retirement savings.
   Resolve to contribute at least enough to your 401(k) plan to earn your employer’s match. Otherwise you’re giving up “free” money. If you can afford to contribute more to your retirement plan or to an IRA, do so. You’ll be glad you did.
3. Review your investments quarterly.
   Resolve to review your investments regularly. Decide on investments to keep or sell, and rebalance your portfolio.
4. Set up an education plan.
   If you have children or grandchildren, resolve to meet with your tax advisor and establish a tax-advantaged plan to fund their education.
5. Keep better records.
   One secret of good tax planning is good recordkeeping. Resolve to set up a simple system to maintain essential records.
6. Update your estate plan.
   Resolve to update your estate plan this year. You’ll be surprised how quickly changes can occur. And remember that good estate planning includes more than just a will or living trust.
7. Take your tax preparer to lunch.
   Some time after April 15, go to lunch with your tax preparer. Take a copy of your return and review it line by line, discussing ideas for additional tax savings.

Please call our office if you have questions or if you would like to set up an appointment. We want to help you make the most of 2010.

Federal Employment Tax Recordkeeping Requirements

The IRS is reminding employers about the importance of keeping good records. Employment tax records must be maintained for at least four years after the later of the due date of the tax for the return period to which the records relate, or the date the tax is paid (see Reg. § 31.6001-1(e)(2)). The records should include the following information:

1. Employer identification number (EIN);
2. Amounts and dates of all wage, annuity, and pension payments;
3. Amounts of tips reported;
4. The fair market value of in-kind wages paid;
5. Names, addresses, Social Security numbers, and occupations of employees and recipients;
6. Employee copies of Forms W-2 that were returned as undeliverable;
7. Dates of employment;
8. Periods for which employees and recipients were paid while absent due to sickness or injury, and the amount and weekly rate of payments made to them by the employer or third-party payers;
9. Copies of employees' and recipients' income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V);
10. Dates and amounts of tax deposits;
11. Copies of returns filed;
12. Documentation for allocated tips; and
13. Documentation for fringe benefits provided, including substantiation.

A willful failure to keep required records is a misdemeanor punishable by a fine of up to $25,000 ($100,000 for corporations) and/or imprisonment for up to one year.