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2010: A Good Year to Die?

For high-net-worth individuals and their advisors, January 1, 2010 marked more than just the New Year. It marked the beginning of a year of no federal estate taxes, or death taxes as they are known to some, and reduced gift taxes. For many, 2010 is a year filled with confusion with respect to estate planning.

At first glance, this may seem like a positive development—and yes, there are some great opportunities that can be implemented into estate plans to take advantage of Congress’ actions (or lack thereof). However, for many there are a number of unintended consequences that may prove catastrophic since estate plans are created under the assumption that estate taxes exist.

Depending upon how a will is drafted, monies which one believed was passing to a spouse or grandchildren prior to 2010 may now significantly change, or even be eliminated.

Many believe that Congress will reinstate the federal estate tax—and impose a new Generation-Skipping Tax (tax assessed on distributions from an estate to beneficiaries two or more generations down)— and raise the tax on gifts in 2010 and have them apply retroactively to the beginning of the year. So, now is the time for anyone with a net-worth of more than $3.5 million to revisit their estate plan and life insurance strategy to ensure that not only are they protected, but that they have created a plan that provides security and maintains their legacy for future generations.

While it’s recommended that individuals review their estate plans every three years, here are a few things to consider when reviewing your estate plan this year:

  • Gifting. The highest marginal rate for gift tax has been reduced from 45 percent to 35 percent.

If the highest marginal rate remains at 35 percent this year, then 2010 is a good year to make gifts if they are subject to gift tax. The gifts and the future appreciation of those gifts are out of your estate.

  • Low Interest Rates. Your children (or trusts for your children) can purchase interests in assets from you and repay you over time.

The applicable federal rates on short-term, mid-term and long-term promissory notes are at a low right now, creating a “perfect storm” and making repayment more manageable.

  • Life Insurance. Are you using life insurance as a hedge in your estate plan? Do you consider life insurance as its own asset class? For many, Trust Owned Life Insurance is an ideal way to protect wealth, tax free.

A life insurance trust is designed to keep the proceeds of a life insurance policy out of one’s estate and provide the estate with the liquidity it needs. With proper planning, the proceeds from life insurance held by a trust may pass to the beneficiaries free of estate taxes, and provide cash liquidity, which then may be used to help pay estate taxes or other expenses, such as debts or living expenses of the trust beneficiaries.

Take the time to review your life insurance policies and make sure they still fit your needs, your risk tolerance and your risk profile, to ensure they still work within your estate plan.

  • Consider Converting IRAs and 401(K)s to Roth IRAs and 401(K)s. Commencing January 1, 2010, taxpayers at all income levels can convert regular IRAs and 401(K)s to Roth IRAs and 401(K)s.

In addition, if you make the conversion in 2010, you can stretch payment of the income taxes resulting from the conversion into 2011 and 2012. Also, consider paying the income tax from your personal estate, rather than paying it from the IRA, this will allow you to keep 100 precent of the money tax-free.

  • Consider Qualified Personal Residence Trusts (QPRTS), Grantor Retained Annuity Trusts (GRATS) and Sales to Defective Grantor Trusts (“IDGTs”). All are strategies for transferring wealth during your lifetime with maximum tax planning.
  • Remember State Estate Taxes. For example, New York assesses a state estate tax. If you are a New York resident, your estate will still be taxed if you pass away.

From an estate planning perspective, 2010 is a wild card year. Be prepared. Take advantage of some of the opportunities out there right now. Most importantly, make sure you are protected from the current law and potential legislative changes on the horizon.

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David Kleinhandler is managing partner at DKA Advisors (www.dkainsure) a financial planning company that serves high-net-worth individuals and businesses with innovative life insurance and annuity products. Laurie Ruckel is a partner at Loeb & Loeb, LLP, specializing in estate planning, succession planning, estate and trust administration and estate taxation. You can contact David at davidk@davidkleinhandler.com and Laurie at lruckel@loeb.com.

Watch "Tom Brokaw Reports: Boomer$!", Thursday, March 4 at 9pm ET on CNBC. The program will also air Saturday, March 6 at 7pm ET; Sunday, March 7th at 9pm ET; and Monday, March 8th at 8pm ET.

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