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The White House is proposing to limit the ability of families to use partnership structures to minimize the valuation of assets for estate tax purposes.

A family might set up a partnership to introduce younger family members to investing while the parents maintain control over the assets, or a family might set up a partnership to account for the possibility of divorce.

Restrictions often accompany these partnership setups, including a partner’s ability to take a distribution or to transfer an asset without the consent of a general partner. Accordingly, families discount the value of these partnership interests when valuing them for estate tax purposes.

The White House is seeking to curtail these adjusted valuations.
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The White House recently proposed changes to the rules governing Grantor Retained Annuity Trusts. These trusts pay an annuity to the grantor over the life of the trust that equals the initial value of the assets plus an interest rate established by the IRS (currently 2.4 %). The annuity is not taxed since it flows back to the creator of the trust.

If the investment produces a greater return than the IRS established rate, there is a remainder in the trust which can be transferred to the beneficiaries of the trust without any gift tax being assessed.

But if the trust grantor dies during the term of the trust, the assets in the trust revert back to the grantor’s estate and are subject to estate taxes. To minimize the risk of the grantor passing away before the end of the trust term, Grantor Retained Annuity Trusts have been established which have short terms, some as short as two years.

Without the GRAT setup, any gifts by an individual in excess of $1 million over the individual’s lifetime would be subject to the current 45% tax.

The White House has proposed setting a minimum term of 10 years for GRATs. This minimum term might encourage individuals over 75 years of age to reconsider establishing a GRAT.
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A Grantor Retained Annuity Trust (GRAT) is comparable to an annuity. You place funds in the annuity and receive an annual payout based on the IRS stated interest rate at the time you establish the trust. This rate is currently 2.4%

When the annuity matures, any appreciation above the current rate goes tax free to your designated beneficiaries, who most likely will be your children.

Currently, interest rates and asset values are low so there is a very good chance that the assets in the trust will grow at a rate above 2.4%. Any growth above 2.4% passes tax free to the beneficiaries.
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An excellent way to donate to a charity is through a traditional IRA.

Ordinarily, if you designate someone as the beneficiary of your IRA, he would owe income tax on the withdrawals and the value of the IRA would be included in your estate for tax purposes. But if you name a charity as the beneficiary, the charity would owe no tax on the withdrawals and you could reduce the taxes your estate would pay.

This strategy should not be applied to a Roth IRA because a Roth is funded with after tax dollars and whoever withdraws the funds will not have to pay income tax on the withdrawals.

If you prefer to give the funds to charity now, through the end of 2009 you can transfer up to $100,000 directly to a charity as long as you are 70 1/2 or older. You cannot claim a tax deduction for the contribution, but you will not owe income tax on the withdrawal.

Another option is a charitable remainder trust. The assets in the trust pay you an income for a specified number of years or for your lifetime. After the trust matures, the assets are distributed to the charity you designate. There is a requirement that at least 10% of the funds you put in the trust go to the charity.

The advantages of a charitable remainder trust are that you can take an immediate tax deduction based on the present value of the gift that the charity will receive; you get a fixed income stream of at least 5% of the trust’s value each year; and you can move assets that have appreciated in value and sell them in the trust without incurring capital gains taxes.
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A Bypass Trust, also known as a Credit Shelter Trust, lets a married couple double the estate tax exemption.

For example, if the husband dies first, his assets fund a trust for the children up to the estate tax exemption amount (currently $5 million Federal and $4 million for Illinois). All remaining assets go to the widow in a second, separate trust. The first trust (the children’s trust) is drafted to allow the widow access to the principal for medical costs and other needs. This safeguards against the funds in the widow’s second, separate trust from being completely depleted and the widow running out of money without access to the funds in the first trust.

The advantage is that when the widow dies, she can pass on $5 million in assets Federal tax free ($4 million Illinois tax free) to the children. Also, the Bypass trust allows for another $5 million Federal ($4 million Illinois) in assets to be passed on tax free to the children.

Another benefit to the first spouse to die is that this arrangement ensures that the assets will go to the children and not a second spouse of the widow.
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Here’s another reason to convert your traditional IRA to a Roth IRA:

When you convert to a Roth IRA, you can pay the conversion fee out of other assets. That is, you can pay the conversion fee from funds not in the traditional IRA. This will maximize the amount that you are converting to a Roth.

Because portfilios have been beaten down and values are currently likely to be far below their amounts in the past, you will have assets with depressed values in an account likely to increase significantly in value. All of this increase will be tax free when withdrawals are made from the Roth account.
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Hoping to give investors a chance for their accounts to recover from the losses incurred in 2008, Congress recently suspended the law requiring owners of IRAs and 401(k)s who are over age 70 1/2, and those who have inherited such accounts, to make a minimum withdrawal in 2009. But this simple idea — a one year break from required withdrawals — is turning out to be not so simple in its execution.

The particulars are set out in the Wall Street Journal article New IRA Law Bewilders Investors. Problems are arising because the IRS and the Treasury Department haven’t provided adequate guidance.

401(k) plan sponsors must get approval from the federal government for their plan documents. These sponsors fear that their suspension of payments will violate their documents and feel compelled to get government approval before enacting any suspension of payments. This government approval is not something quick and easy to come by.

The article includes the following advice:

1) Contact your IRA custodian or the administrator of your 401(k) directly and ask what steps are needed to suspend distributions in 2009;

2) Regarding 2010, ask the custodian or administrator what steps are needed to get the automatic distributions started again; and
3) You may want to roll your traditional IRA assets into a Roth IRA so that in the future you have no required distributions or taxes on future earnings.
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In his article in The Wall Street Journal titled Obama Plans to Keep Estate Tax, Jonathan Weisman points out that President-elect Barack Obama and congressional leaders plan to retain the estate tax instead of allowing it to expire as scheduled in 2010.

Under the new plan, the estate tax would be locked in at the 2009 rate and exemption levels. This would mean that estates of $3.5 million ($7 million for couples) would be exempt from the estate tax. The value of the estate which exceeds $3.5 million would be subject to a tax of 45%.

If the tax were returned to the levels before the change in the tax law in 2001, the tax would exempt only $1 million with the excess over $1 million taxed at 55%.

The Obama plan could be looked at as a compromise position. It imposes a limit on exemptions from estate tax ($3.5 million) while at the same time it keeps the exemption at a level high enough that fewer than two percent of annual deaths would be subject to the estate tax.
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In a recent article in the Wall Street Journal titled, How to Fix Your Life in 2009, Eleanor Laise provides advice for individuals whose stock portfolios have been beaten down.

She suggests taking advantage of the $13,000 exemption from gift taxes that one can use to give up to $13,000 in stocks to as many recipients as one wants without incurring any gift tax liability. This has the advantage of reducing the size of one’s estate and, accordingly, one’s estate tax liability. It also allows the recipients of the gift to benefit from an increase in stock prices over the long term.

Another suggestion is to consider a Grantor Retained Annuity Trust or GRAT. Ms. Laise points out, “You can put your beaten-down stock in the GRAT, name your children as beneficiaries, and receive an annuity from the trust based on a percentage of what you contributed. As long as you survive the trust term, often just a couple of years, any stock appreciation beyond a ‘hurdle rate’ set by the government passes to the beneficiaries tax-free. That hurdle rate, currently 3.4 %, is at historically low levels, and it’s set to move even lower”.
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Daniel Henninger’s recent article in The Wall Street Journal titled “U.S. Says It Will Bail Out Christmas” is too entertaining not to be included in this Christmas blog:

With the government on the brink of rescuing the U.S. auto industry, we have learned that the Treasury Department is drawing up plans to bail out Christmas. “We have reason to believe,” said a person close to the matter, “that without an immediate capital injection, Santa Claus will fail before December 24.” Mr. Claus could not be reached for comment.

Government officials are said to be concerned at the risk that the collapse of Santa Claus could pose to the nation’s intricately related system of holiday happiness. Though a failure by Santa Claus poses the largest systemic risk, the government is also prepared to step in to bail out Christmas trees, caroling parties and mistletoe producers.

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