The past year has ushered in economic uncertainty around the globe. Addressing that uncertainty is clearly the top concern for many, if not all, of you, and you may wonder how estate planning fits into your overall financial and life plans. Recent changes in the law and the impending sunset of the of the estate tax provisions of the EGTRRA of 2001 make estate planning an essential component of any plans you make for your finances and other affairs. Below are some recent changes that you should be aware of.
Increase in the Annual Gift Tax Exclusion
You may now gift up to $13,000 total per recipient throughout the year without any gift tax consequences ($26,000 if you and your spouse opt to gift split for all gifts that you make this year by filing a gift tax return). Since gifting is also a way that we recognize milestone events or give a helping hand to family and friends, whether in the context of education, a wedding, a new home, a new baby, etc., it is important to keep in mind the annual exclusion amount and consider gift splitting, if appropriate and if both spouses agree. If you and your spouse have an ongoing program of gifting and you wish to have us review your gifts to determine if gift splitting is appropriate, please call or email our office.
Increase in the Amount Exempt From the Federal Estate and Generation Skipping Transfer Tax
The amount exempt from the federal estate tax and generation-skipping transfer tax has increased from $2 million to $3.5 million. This is the largest single increase that has ever occurred, but the exemption will become unlimited in 2010 before expiring in 2011, unless Congress takes action. Even if Congress takes action before 2011, there is no way to predict what direction Congress will take. Many estate planning documents use formula language, e.g. "the maximum amount that can pass free of federal and state estate taxes" or "all property which has an inclusion ratio of zero (0) for purposes of the generation- skipping transfer tax." If this is the case with regard to your estate planning documents, these formulas may have unintended consequences if you die in 2009 or 2010, potentially disinheriting certain beneficiaries while leaving the bulk of your estate to others whom you intended to receive only a limited bequest. If you would like us to analyze the current distribution and estate tax consequences of your estate planning documents, please call or email our office.
Reduced Principal Residence Exclusion Where Home Not Used Exclusively as Principal Residence
In light of the depressed real estate market, many homeowners are becoming landlords when a move is necessary and cannot be delayed until the home sells. However, due to recent legislation, renting an unsold home after January 1, 2009, can potentially reduce your capital gain exclusion when your home does sell. If your residence is sold after December 31, 2008, the amount of the capital gain resulting from the sale that can be excluded under §121 of the Internal Revenue Code (currently $500,000 for a married couple filing jointly or $250,000 for a single person) will be reduced proportionately for the period of time your home was not used as your principal residence after January 1, 2009. If you need to rent your unsold home, I recommend that you consult with your accountant to address what you can do now to mitigate any capital gains when your home does sell. If you are planning to hold on to and manage rental real estate for the near future, you should consider setting up a limited liability company (LLC) with either single or multiple members or another corporate entity to help manage the business operations and provide some protection from personal liability. Please call or email our office if you are interested in using a corporate entity to help manage rental real estate.
Changes to Your Professional Executor or Trustee
If you have recently decided to change your professional executor and/or trustee, you should review your estate planning documents to ensure that your prior professional executor and/or trustee is not included in any unwanted fiduciary capacity and that your new professional executor and/or trustee is included. Please call or email our office to update the fiduciaries in your estate planning documents.
Updating Your Estate Plan
Have there been any changes in your personal, familial, or financial circumstances? Should you wish to have your estate plan reviewed, please call or email our office to request an estate planning questionnaire so that we can review your plans in light of your current situation.
General Tax Planning
You should project your 2009 income and tax liability and determine if you are on track to pay the proper amount of tax, either by employer withholding or estimated tax payments. The withholding calculator at the IRS Website, www.irs.gov, is an excellent tool for determining if you have paid enough tax. You should also determine if you can defer income otherwise due in 2009 until 2010. Taxes on any postponed income may not be due until 2011, providing you a year of deferral. Conversely, determine if there are any expenses you can prepay in 2009 to get the deduction this year.
The following are some additional steps you can take:
- Review your potential and actual capital gains on year-to-date investments and any capital loss carryovers from prior years. Depending on your situation, you may be able to effectively produce tax-free gains.
- Plan to spend all the funds that you will contribute to your flexible spending account. Any funds not used by the end of the year will be forfeited.
- Consider maxing out your allowable pension contributions for 2009. At the very minimum, ensure that you have contributed enough to take full advantage of any employer matching.
Finally, pay particular attention to the alternative minimum tax. Each year a greater number of people are subject to this tax, and if you have very high deductions and credits, many of the above strategies may be counter productive due to the alternative minimum tax.
Please contact Patricia M. Annino at 617 456 8009 or pannino@PrinceLobel.com if you would like additional information regarding any of the estate planning topics discussed above or if you would like our assistance to help you implement your estate planning strategy.