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Estate Planning & Tax Update

January 07, 2010

Federal Estate Tax Changes in 2010
On January 1, 2010, the Federal Estate Tax and the Federal Generation-Skipping Transfer Tax were repealed. This repeal is scheduled to last only for the balance of the year. Thereafter, barring Congressional action, the Federal Estate Tax and Federal Generation-Skipping Transfer Tax will return on January 1, 2011 - with an Estate Tax exemption of $1,000,000 and a Generation-Skipping Transfer Tax exemption of approximately $1,300,000, depending on inflation factors. The Federal Gift Tax exemption of $1,000,000 remains in effect, however, for 2010 and going forward.

Most estate planning attorneys and commentators do not believe that the repeal will stand - although nearly all thought changes to the estate and generation-skipping transfer tax repeal would have come before 2010. Although there continues to be some discussion of retroactive legislation in 2010 resulting in the 2009 exemptions and rates to apply this year, and perhaps going forward, there is still uncertainty as to what Congress will do. We will, of course, communicate with you about any final tax law changes when they are made, but wanted to make you aware of the unusual circumstances we are currently facing.

Under current law for 2010, we have a different taxation system called a "carry-over basis" system that would apply at an individual's death occurring in 2010. This means that heirs would inherit a decedent's basis in the property they receive from the decedent for capital gains tax purposes. The tax law provides for up to a $1,300,000 basis increase for a 2010 decedent and an additional $3,000,000 basis increase for property passing to a surviving spouse or certain types of marital trusts, whereas before all assets owned at death received a full basis adjustment, up or down, to fair market value at death, regardless of the amount of the adjustment.

Many estate plans will work just fine under the carry-over basis system and, as mentioned above, the system may never have an application. Although a consultation with your estate planning attorney is necessary to determine how and to what extent this law impacts you, the following situations should not require revisions in 2010 to adequately address the carry-over basis system:

  • Estates of individuals whose assets have less than $1,300,000 of unrealized appreciation in total.
  • Married couples where each spouse's share of marital property and individual property has less than $1,300,000 of unrealized appreciation.
  • Estate plans that provide for all property to pass to a spouse (either outright or in a properly structured Marital Trust).
  • Estate plans of unmarried persons that provide for all property to pass to descendants or other non-spouse beneficiaries or trusts for their benefit.
  • Estate plans that provide for all assets to pass to charity.

Many of our clients would benefit from having their individual circumstances reviewed in light of Congress' inattention to this important part of the tax law. We would be pleased to consult with you and determine the appropriateness of applying a "patch" to your estate and trust planning to account for the potential application of the carry-over basis system and its provisions for basis increase. This may prove to be unnecessary if, as expected, the carry-over basis system is repealed. On the other hand, there is potential utility to the patch in the event that the carry-over basis system does apply to deaths in 2010.

Attached is a table listing the current transfer tax exclusion amounts and the maximum tax rates on transfers above the exclusion amounts. If Congress does not take any action to alter the transfer tax legislation in place, the following amounts as noted on the attached will be effective for 2010 and 2011.

Roth IRA Conversions
As of January 1, 2010, wealthy individuals will have greater access to Roth IRAs. Although they still will not be able to make contributions to a Roth IRA if their gross income exceeds certain limitations, there will no longer be any income limitations preventing them from converting a traditional IRA into a Roth IRA. Roth IRAs can be attractive to certain individuals because the distributions from a Roth IRA (including the investment income earned on the account) are exempt from taxation. An additional benefit for conversions that take place in 2010 is that the income tax due on the conversion can be spread into the tax years 2011 and 2012.

Of significant importance to Wisconsin taxpayers is the fact that Wisconsin has not yet adopted the provisions of the Federal law allowing the conversion from a traditional IRA to a Roth IRA. Accordingly, unless Wisconsin adopts the new law, Wisconsin taxpayers who make the conversion from a traditional IRA to a Roth IRA in 2010 will have different tax treatments for Federal and Wisconsin income tax purposes. Persons who make the conversion and who have modified adjusted gross income of over $100,000 will be subject to certain Wisconsin penalties. If the person is under the age of 59½, the person will be subject to the early distribution penalty. The early distribution penalty is equal to 3.33% of the amount converted. The person will also be subject to a 2% penalty for the excess contribution to the Roth IRA. This penalty will be applied each year until the excess contributions are withdrawn.

A Roth IRA conversion can be undone (referred to as a re-characterization) at any time prior to the due date for the income tax return for the year in which the conversion took place. If a person re-characterizes a Roth IRA conversion, he or she may not make another Roth conversion until the later of (a) the first day of the following tax year, or (b) 30 days after the Trustee-to-Trustee transfer.


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