Despite the current uncertainty about the future of the federal estate, gift, generation-skipping transfer and income taxes, there are important planning techniques to consider as the year-end approaches.
Gifts to Children
The gift tax rate in 2010 is 35%; it is scheduled to increase to 55% in 2011 (along with the es-tate tax rate). If you are planning to make large gifts to your children or grandchildren, consider making them this year and paying gift tax now to take advantage of the lower tax rate.
Outright Gifts to Grandchildren
In 2010, there is no generation-skipping transfer tax on outright gifts to grandchildren. In 2011, gifts to grandchildren in excess of the annual exclusion or the exemption from generation-skipping transfer tax will be subject to a 55% generation-skipping transfer tax in addition to gift tax. If you are planning on making large gifts during your lifetime or in your will to your grandchildren, consider making them in 2010.
In addition, distributions to grandchildren di-rectly from trusts that are not exempt from generation-skipping transfer tax are not subject to the generation-skipping transfer tax in 2010.
Low Interest Rates
The IRS assumed rate of investment return on certain gifts is presently 2% because it is based on the current low interest rates. This low as-sumed rate of return allows for long- term plan-ning for gifts in trust—to charity, to children, or both—which can be very powerful if the actual investment return is greater than 2%. Many clients are engaging in these planning tech-niques now to take advantage of this opportu-nity. In addition, some of these techniques (in-cluding grantor retained annuity trusts) may be limited by future legislation.
Beginning in 2010, the income limitations for converting a conventional IRA to a Roth IRA have been repealed. Compared with conven-tional IRAs, distributions from a Roth IRA are free from income tax and are not subject to required minimum distributions. In 2010, the federal income tax payable on Roth IRA conver-sions may be paid as though one-half of the income was realized in 2011 and one-half in 2012, although many clients are planning to recognize all the income from a conversion in 2010 because they expect income tax rates to be significantly higher in 2011 and 2012.