Our friend Bruce Steiner, Esq has graciously provided the following important estate tax planning tips.  Of note is the end of the “throw your mama under the train” temporary elimination of the estate tax-

The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) increased the estate tax exempt amount in steps from $675,000 in 2001 to $3.5 million in 2009. Under EGTRRA there is no estate tax in 2010.  The old law returns in 2011 with only a $1 million exempt amount.

While the one-year estate tax holiday has received the most attention, EGTRRA and other tax legislation created several tax planning opportunities for 2010 that do not require that you die to take advantage of them.  There is, of course, the risk that Congress could change the law retroactively.  However, as time goes on, the chances of that diminish.

Gift tax

EGTRRA reduced the top gift tax rate from 55% (with a 60% notch from $10 million to $17,184,000) in 2001 to 45% in 2009.  For 2010 only, the top gift tax rate is 35%.  The old law returns in 2011, with the 55% top gift tax rate (and the 60% notch).

Those who have used up their $1 million gifts before or during 2010, may want to take advantage of the 35% gift tax rate in effect this year.

Generation-skipping transfer tax

Not only is there no estate tax in 2010, but there is also no generation-skipping transfer (“GST”) tax in 2010.  Grandparents may wish to make gifts to grandchildren this year when they can avoid both the GST tax and using any of their GST exemption.

It is, unfortunately, not clear whether, if the gift to a grandchild is in trust rather than outright (which includes a Uniform Transfer to Minors Act account), the trustee’s distribution to the grandchild after 2010 will be subject to GST tax.  To avoid any doubt, grandparents may want to make these gifts outright rather than in trust.

Trustees of existing trusts that are subject to GST tax may also want to consider making distributions to the original donor’s or decedent’s grandchildren (or younger family members) to take advantage of the absence of GST tax in 2010.

Converting to a Roth IRA

Before 2010, a taxpayer could not convert to a Roth IRA if his or her income (without regard to the income from the conversion) was more than $100,000.  Beginning in 2010, this income limitation no longer applies.

In addition to the other benefits of the Roth conversion, there are two particular alternative benefits to converting in 2010.  An IRA owner who converts in 2010 can include the income from the conversion one-half in 2011 and one-half in 2012, thus obtaining some deferral and income splitting.  Alternatively, an IRA owner who converts in 2010 can take advantage of the 2010 income tax rates, which may be lower than the rates scheduled to be effective beginning in 2011.

Grantor Retained Annuity Trusts (GRATs)

If the GRAT’s growth and earnings exceed an IRS prescribed “hurdle” rate (and provided you survive the term), then at the end of the term, the remainder passes to or in trust for your beneficiaries without any gift tax.  The current hurdle rate (in November 2010) is only 2%.

If interest rates increase, the required annuity payments will be greater.  There have also been proposals in Congress to require a minimum 10-year term for GRATs and to eliminate the ability to create a “no taxable gift” GRAT.  Either of those changes would likely reduce the benefit of a GRAT.  Accordingly, you may wish to create GRATs now.

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