Temporary Estate Tax Repeal Sows Confusion for Estates

The federal estate tax and generation-skipping tax “officially” expired on January 1, 2010, under laws enacted in 2001.  But many expect Congress to take action in the near future to restore these taxes – possibly retroactive to the beginning of 2010.  The federal gift tax remains in effect for 2010, but with the top tax rate reduced from 45% to 35%.  The $1 million lifetime gift tax exemption, and a $13,000-per-donee annual exclusion, continue in force in 2010.

If Congress fails to act this year, the repeal of estate tax and generation-skipping tax would continue only through December 31, 2010, and both taxes would return in 2011.  After 2010, the tax credits and exemptions would shelter estates (and generation-skipping transfers) of only $1 million (compared to $3.5 million in 2009).  The top tax rate would become 55% for gifts, estates and generation-skipping transfers.

The current state of affairs has created concern and confusion for many estates.  No one can predict what Congress will do, when they will do it, or if measures such as restoring transfer taxes retroactively will hold up in court.

Two groups of people probably need to call their estate planning advisers:

1. Anyone who has a will or revocable living trust containing a “credit shelter trust” (sometimes called a “B” trust or “bypass trust”), or any other estate distribution plan based on a formula clause that refers to the estate tax credit shelter ($3.5 million in 2009) or other estate tax yardsticks, such as "adjusted gross estate."  Such clauses may be hard to interpret with estate taxes repealed, or may leave too much in trust, or otherwise distribute assets in ways not foreseen or desired by the estate owner. 
2. Risk-tolerant estate owners who want to use the current “window of opportunity” aggressively to make taxable gifts at the reduced 35% tax rate, or make gifts to grandchildren (or other so-called skip persons) while the generation-skipping transfer tax is repealed.  Both of those strategies could blow up if Congress changes the law retroactively, and individuals clearly should follow their advisers’ guidance every step of the way.

 

Charitable Gifts from a Revocable Living Trust

Many people have established revocable living trusts as part of their estate plans, usually to avoid probate, arrange for money and investment management, or afford privacy for their estates. A revocable living trust can also provide exceptional opportunities for assisting the organizations you support:

 Lifetime gifts.  You can direct the trustee of your trust to make charitable contributions to qualified organizations – gifts that will entitle you to deductions on your personal tax return.

Distributions at death.  Your trust can accomplish important gifts at death by directing that organizations receive particular assets, an amount of cash or a percentage of your estate – in the same manner as by will. 

Income for family members.  You can direct that part or all of your living trust be transformed at death into a charitable remainder trust that will make payments for life to a family member, with significant benefit for one or more organizations.  Such a gift can save estate taxes that may actually leave your survivors more secure financially.

Please call if you would like to include us as a beneficiary of your revocable living trust.  We can provide our correct legal name for your attorney.

 

 

Payments from Charitable Gift Annuities Are Worth More Than You Might Think

Friends who arrange charitable gift annuities do so primarily to assist our programs.  But donors understand that gift annuities let them magnify that assistance by providing a lifetime of quarterly payments to one or two persons (the donor and her husband, for example).

Single-life gift annuity payout rates range from 5% at age 60 to 9.5% at 90 and above. These rates are high because they represent a combination of both interest and return of principal – with the assurance that payments will continue regardless of how long recipients might live. But the rates don’t tell the whole story.  A large part of your gift annuity payments will be tax-free during your life expectancy.  Additionally, if you ‘itemize” you’ll enjoy income tax savings from a sizable charitable deduction.  The combination of these two benefits effectively increases the value of your payments.

We’d be pleased to provide a detailed illustration of the tax and financial benefits of a gift annuity for your particular situation, including two-life annuities.  Just call our office at 1-800-843-8114 and ask to speak with a member of our Gift Planning Staff.

Social Security Taxes in 2010

Tax rates:  The rate is 6.2% on the first $106,800 of an employee’s taxable earnings in year 2010. 
Medicare tax of 1.45% applies on every dollar of every employee’s taxable earnings.  A total of 7.65% is matched by employers up to $106,800, plus 1.45% Medicare tax on amounts over $106,800.

Employment and Social Security benefits:  Retirees under age 66 can earn up to $14,160 in 2010 without loss of Social Security benefits; above $14,160 they lose $1 in benefits for every $2 of earnings.  There is no cutback in benefits after age 66.

Taxation of Social Security benefits:  Up to half of Social Security benefits is taxable for single persons with “provisional income” over $25,000 ($32,000 for joint returns).  Up to 85% is taxable if income exceeds $34,000 (singles) or $44,000 (joint returns).

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