How to take advantage of estate tax planning opportunities now

What opportunities should people be taking advantage of now?

There are some great opportunities out there for the larger estates if they want to be aggressive.

Since there’s no generation-skipping transfer tax as we speak right now, a direct transfer of unlimited amounts to a grandchild will not be subject to this tax, albeit subject to gift taxes if the transfer exceeds $1 million.

If you transfer property in excess of $1 million to somebody this year, the tax rate is only 35 percent, which is a far cry from the estate tax rate that was in place in 2009, which was 45 percent. It’s a further far cry from the 55 percent that’s likely to be in place in 2011 if Congress doesn’t change the law. So there’s an opportunity to make some tax effective gifts this year. The risk is that Congress could reinstate generation-skipping transfer taxes retroactive to January 1, 2010 and reinstate the higher gift tax rate retroactively as well. However, for the most part, taxable gifts might still be a good plan to effectuate. If done properly, the taxpayer could actually straddle the fence waiting for what Congress does and make elections to effectuate or not effectuate a gift.

Finally, discounted gifts with use of family partnerships should be explored.

What pitfalls should people be aware of?

The worst-case scenario that we’ve seen is with clients in a second marriage who decide to leave the exemption amount to their children and the balance of their estate to the spouse. The thinking is that they won’t have to pay any estate taxes on the property that went to their children and on the property that was in the trust for the second spouse through a combination of using their exemption and the marital deduction. But if you look at that document today, depending on how it’s drafted, it could be interpreted to say that all their property is going to the children and nothing is to be left to the spouse. It may very well say, ‘Transfer to my children what can be transferred without any estate taxes being associated with the transfer,’ and in 2010 that would mean everything.

What should be done now?

Sit down with your tax adviser right now to revisit your documents and make sure they will work as you’ve intended them to, and make sure that your estate and your estate planning documents are in good order to maximize the tax savings that can potentially be had if death occurs in 2010. Even the administration of a decedent’s estate for the period of time that we have this repeal may have to be addressed differently.

Thomas J. Sigmund is a director with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5462 or [email protected].