Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

The IRS recently announced in Revenue Procedure 2009-50 that the gift tax annual exclusion amount available to taxpayers in 2010 will remain unchanged at $13,000. The Tax Reform Act of 1997 tied the then $10,000 gift tax annual exclusion to cost of living adjustments based on increases in the Consumer Price Index. As a result, since 1998, the annual exclusion has increased from $10,000 to $13,000. The annual exclusion permits a taxpayer to gift $13,000 annually to any beneficiary without being required to use his or her $1 million lifetime gift exemption amount.

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As of January 1, 2010, new rules take effect, permitting taxpayers to convert their traditional IRAs to Roth IRAs without any income limitations.  Click here for an overview of Roth IRAs and a summary of the new conversion rules.

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The imminent federal estate tax legislation is on everyone’s minds, and it appears increasingly likely that the legislation this year will be a one-year patch, or a one-year freeze of the 2009 rules (a 45% estate tax rate and a $3.5 million exemption).

According to the Association for Advanced Life Underwriting (“AALU”), an important trade and public affairs group, permanent reform is less likely this year and enactment of a one-year patch is the most likely outcome.

Some of the important considerations in the estate tax legislation debate include:

• Cost. According to congressional analysis, permanent enactment of the 45% estate tax rate and a $3.5 million exemption will “cost” the government $233 billion over 11 years (that is, compared to the 2001 rules which could return in 2011). Given large federal deficits, lawmakers may focus on the estate tax as one area to recover revenues lost through AMT reform, the R&D credit or other law changes.
• Reunification, portability and indexing. Some of the more thought-provoking issues in the estate tax debate include (1) reunification of the gift and estate tax exemptions, (2) the portability of unused exemption amounts between spouses, and (3) indexing the exemption amounts to inflation.
• Limitations on lack of control and lack of marketability discounts. Restrictions on the use of discounts are included in the “Pomeroy” bill, currently the leading bill in the House. It is of course unknown at this time whether this provision will be enacted.

The AALU predicts that the Senate debate on the estate tax will extend to mid or late December. We will continue to post updates as new issues arise regarding this legislation.
 

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Late in 2008, the Worker, Retiree and Employer Recovery Act of 2008 was enacted, which provided for a one-year suspension of the required minimum distribution rules in 2009 due to the economic meltdown. This means that IRA and 401(k) participants and beneficiaries are not required to take minimum distributions in 2009. Unfortunately, the enactment of the law in late 2008 resulted in many participants unknowingly taking their minimum distributions in 2009.

On September 24, 2009, the IRS issued Notice 2009-82 to provide relief for taxpayers who already took minimum distributions in 2009 but now want to take advantage of this one-year suspension rule. Basically, taxpayers now have until November 30, 2009 to rollover their mistaken 2009 minimum distributions without any adverse tax consequences.
 

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The IRS has released the AFR interest rate for October, reducing the September AFR rate from 3.4% to 3.2%. While this is above the historically low 2% AFR rate in February, it still represents a very low interest rate, making GRATs a very attractive estate planning device to transfer significant wealth to your family members gift and estate tax free. In this environment where there are some proposals in Congress designed to curtail the use of GRATs, it again highlights that now is the time to seriously consider implementing a GRAT if you have a large taxable estate.

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With school in full swing and parents of college-age children becoming empty-nesters again, one important estate planning question comes to mind: can you as a parent get medical information about your college-age child in the event of an emergency? This concern is especially relevant this year as concerns about swine flu (H1N1 virus) are widespread.

Once a child turns 18, parents generally no longer have legal authority over their child’s financial or medical decisions, even though high-school and college-age children usually are still dependent on their parents.

Moreover, the Health Insurance Portability and Accountability Act (“HIPAA”) imposes high standards of patient privacy on hospitals, physicians and other health care providers. Because of this, many medical providers will not provide any medical information to anyone without the authority of the patient.

One solution is for parents to ask their college-age children to sign a power of attorney and health care directive. These routinely prepared estate planning documents authorize the parents to obtain medical information and make medical and financial decisions for a child if the child is unable to make such decisions for himself or herself. By keeping copies (or, better yet, electronic copies) of these documents readily available, parents will be better prepared to respond in case of an emergency involving the child.

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