Thursday, September 23, 2010

Devising Strategies While the Estate Tax Is in Limbo -

Here's one of the great things about social media: you get know experts that you have never met, and probably would not have ever heard of, if they had not been active in posting their articles and portions of their books on sites like Twitter.

I first ran across the name of attorney Deborah Jacobs about a year ago, on Twitter. She had just published a book called Estate Planning Smarts, which is an excellent guide for anyone interested in the subject (interestingly, she published it herself, rather than using a conventional publisher). She also writes periodically for Forbes and the New York Times.

Again, I have never met Deborah, so my endorsement of her work is based solely on what I have seen and read.

In any event, she published a piece last week in the New York Times about what individuals should be thinking about doing while the debate over the estate tax continues. Her article contains a number of good suggestions, so I would encourage you to read the whole note, but there were a couple of suggestions that I thought were particularly interesting.

First, she discusses the possible use of life insurance:

During this period of uncertainty, buy a one- or two-year term policy to cover the tax bill if the exemption amount is only $1 million, said Ann B. Burns, a lawyer with Gray Plant Mooty in Minneapolis. The policy can be canceled if Congress eases your estate tax concerns.

Be sure that your beneficiaries, not you, own the policy, or the proceeds will count as part of your estate and could be subject to tax. As owners, your beneficiaries must pay the premiums, but you can give them the money to do that using annual gifts. If you already own a policy, sell it to the trust or to family members for its fair market value, said Ms. Burns.

The other idea which one of my clients is actually did last week involves lending money to a family member that might need some financial help:

If you lend money to family members — say, to buy a house or a car or to start a business — you create a win-win situation. You must charge a minimum rate of interest set each month by the Treasury, called the applicable federal rate, to avoid potential gift tax and income tax consequences. For September, the rate for loans lasting more than nine years and requiring monthly payments is an attractive 3.6 percent. That is less than family members would have to pay for a bank loan, assuming they could get one in today’s tight credit market, but more than you could earn from C.D.’s or money market accounts.

Here's the link to the whole piece:

Devising Strategies While the Estate Tax Is in Limbo -

Also, on Monday of this week, the Wall Street Journal had a good article on estate-tax planning. In this piece, the Journal asked several estate tax planning experts what they are currently advising their clients to do:

Both Ms. Jacobs and the Journal talk about gifting strategies as part of the estate tax planning process. Here's a excerpt from the Journal's article (which is actually quoting someone named Marv Hills):

Since clients expect that the estate tax is coming back in 2011, they are making plans now to implement taxable gifts this year. This way, they can pay gift tax at the 35% gift-tax rate applicable in 2010, in order to avoid paying estate tax later at a presumably higher rate in 2011 and after. Although it seems certain that an estate tax will exist beginning in 2011, it is impossible to know whether the rate will be 55% as currently scheduled, or a different rate if Congress changes the law before next year.

Even though the gift-tax rate is low in 2010, some clients are waiting to make the gifts very late in the year, between Dec. 26 and 31, because they are concerned about the risk of dying unexpectedly during 2010. These clients realize that if they make a taxable gift now but then die before Congress changes the laws, they will have paid gift tax at 35% when the assets could have passed through their estates in 2010 without being subject to estate tax....