Estate Planning

Jones Foster’s Top Ten Tax Topics, 2009 (Part 1)

1. Required Minimum Distributions from IRAs and some pension plans are suspended for 2009 for IRA owners, plan participants, the beneficiaries of inherited IRAs and the beneficiary of a trust to which an IRA is payable. There is no bunching of two years worth of RMDs in 2010, rather the normal payout requirement in 2010 is applicable.

2. Charitable payouts directly from an IRA of up to $100,000 to a charity may be made in 2009. This is an extension of a prior provision.

3. Low interest intra family loans, GRATS and other techniques favored by the low IRS percentage rate under § 7520 of the Internal Revenue Code. For several months this key rate has been decreasing and in February it dropped to 2.0%, which means that a short term note needs only bear an interest rate of 0.6%, a mid term note needs only bear interest at the rate of 1.65% for an annual payment, and a long term note i.e., a note of 9 years or more needs only to bear a rate of 2.92% for monthly payments and 2.96% for annual payments. The rates for March increased to 2.4% for the 7520 rate, and to 0.72%, 1.94% and 3.52%, respectively for the short, mid-term and long term note rates. This will also affect outstanding loans which are not subject to a prepayment penalty inasmuch as the current rate may be renegotiated down to the current low rates without fear of creating a gift generated by the reduction in the interest rate.

4. Zeroed out GRATS. With the decline in the § 7520 interest rate the annual payments from a two year GRAT are now even lower than in the past several months, which makes this technique even more attractive. After the Grantor receives the first year's payment at the end of the first year those proceeds may be reinvested (rolled over) into a new GRAT, or the Grantor may retain sufficient cash from the distribution to pay taxes on the income to be reported as the Grantor of the Trust, and then the Grantor may contribute the balance to the new GRAT. Remember that the GRAT payment must be paid out as scheduled, and if there are insufficient cash resources within the GRAT, then assets contributed to the GRAT may be redelivered to Grantor free of any income tax liability inasmuch as the trust is a true Grantor trust. (See Item 10 however)

5. Investment Advisory Fees have recently been held to be subject to the 2% floor for deductibility purposes, which basically means that Trustees must distinguish between the administrative portion and the investment portion of advisory fees; however, in IRS Notice 2008-116 a Trustee does not need to "unbundle" the Trustee fee for 2008. A similar notice was issued for the 2007 tax year. Please note nevertheless that investment advisory fees incurred by an individual Trustee will be subject to the 2% floor in 2008.

6.     FDIC bank account insurance limits have been increased from $100,000 to $250,000 per person through 2009. A couple may therefore have an account of up to $500,000 held in a bank insured under FDIC. While there is legislation brewing to extend this limit beyond 2009, be prepared at the end of the year to reduce your accounts to $100,000 per person by December, 2009.

7.     Pending legislation would "freeze" the current $3.5 million estate tax exempt amount for a number of years and thus avoid a situation where the estate tax would disappear in 2010 and then reappear with only a $1 million estate tax exemption in 2011. Current legislation does not include the hoped for "bundling" provisions whereby a couple would have a total of $7 million worth of exemptions without the necessity of utilizing credit shelter or bypass trusts. There also would be a flat tax of 45%, but for taxable estates in excess of $10,000,000 there would be a new 50% rate.

8.     Gift tax exemptions now stand at $13,000 per person per year plus the lifetime gift exemption of $1 million per donor. Keep in mind that the payment of medical expenses and certain tuition expenses directly to the institution on behalf of any other person is totally exempt from gift tax ramifications, but it does not include payments to individuals who then effect those payments to the provider of services.

9.    Family limited partnerships and/or limited liability companies (LLC) are coming under attack when the partnership is made up entirely of marketable securities. The proposed legislation will do away with discounts for lack of marketability and lack of control except with regard to a true business enterprise. Much of the language needs to be fleshed out in this area, but watch for these changes. It is anticipated that the effective date of the legislation will be the date of enactment, so those interested in taking advantage of the current discounting climate should act fast to beat the effective date, if the date of enactment proves to be the termination of this discounting device.

10.     Another anticipated change is in the world of GRATS, which change is not in the currently proposed legislation. The proposal would require that any GRAT have a remainder interest valued at at least 10% of the assets contributed to the GRAT. This will make the utilization of "zeroed out GRATS" less attractive, and again one might consider taking advantage of the current climate before any proposed legislation is enacted.