Presented by Richard K. Babush, CPA, JD & Scott Pohar, CPABabush, Neiman, Kornman & Johnson, LLP

“I’m proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money.”

Arthur Godfrey

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Tax Year 2009Estate Tax:

Exclusion = $3.5 Million Max. Tax Rate = 45% Step-Up in Basis to FMV @ Death $1,000,000 Gift Tax Exclusion if Fully

Utilized Will be Subtracted From $3.5 Million Estate Tax Exclusion at Death

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Tax Year 2009Gift Tax:

Annual Exclusion = $13,000/individual Lifetime Exclusion = $1,000,000 Tax Rate = 45%

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Tax Year 2010 Gift Tax:

Exclusion = $1,000,000 Lifetime $13,000 Annual/Individual Tax Rate 2010 = 35%

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No Step-Up to FMV on AssetsModified Carryover BasisAggregate Step-Up on Basis of $1.3

Million per Decedent – Plus $3 Million Step-Up of Assets Transferred to Spouse

All Other Transfers – Cost Basis (Historical)

Sale of All Transferred Assets Must Apply Modified Cost Basis for Gain or Loss

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Unified Estate and Gift Tax Will be Reinstated with Combined Exclusion of $1 Million

QFOBI Restored – Max Value $1.3 Million Max Tax Rate – 55% - Plus 5% Surtax

From $10 Million to $17.184 Million Step-Up to FMV of All Assets Transferred

at Death State Tax Credits Reinstated State Death Tax Deduction Goes Away

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Tax be Maintained at its 2009 Parameters

Exemption - $3.5 Million (Not Indexed) Tax Rate - 45% No Offset for Revenue Loss Gift & Estate tax not unified, therefore,

lifetime gifting will still be limited to $1,000,000

No portability of Exemption between spouses

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Exemption - $5 Million Phased in Over Ten Years – Indexed

Tax Rate - 35% Phased in Over Ten Years

Step-Up to FMV of All AssetsDecedents in 2010 – Election for

Either 2010 Law or New Law

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▪ 2011 Estate Tax Rate – 55% - 60%▪ 2010 Gift Tax Rate 35%▪ Proposal to Limit Valuation Discounts▪ Proposal Mandating Ten-Year Min. for GRATS▪ No GST Tax in 2010 – On Direct Gifts▪ The Gift Tax is Tax Exclusive vs. Tax Inclusive for

Estate Taxes▪ Reduce Further Appreciation of Assets (Real

Estate, etc.)▪ Current Values are Depressed in Many Cases▪ Donor Will not Outspend Current Value of the

Estate▪ Enjoy the Experience of Gifting During Life

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If Donor Survives the Date of Gift by Three Years, the Gift Tax Paid is Excluded From the Donor’s Estate for Estate Tax Purposes, i.e., The 35% Gift Tax Rate is Effectively 25.93%. The Donor Effectively Transfers $1.35 of Value for Each $1.00 Gifted, but is Only Subject to Tax on $1.00.

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Use High Basis Assets First If low basis assets, consider selling them at this

years 15% rate and gift cash Basis of Remaining Assets

Partial Step-up in 2010 Full Step-up in 2011

Three-Year Rule vs. Death in 2010 Physical Condition and Health of Donor. Death in

2010 Would Dictate Against Taxable 2010 Gifts The Rule for when the 3-year rule starts is the

date of the gift. 

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If husband and wife split their taxable gifts in 2010, pay very close attention to who pays the gift tax. If one spouse is in bad health, have the other pay the tax. The odds that the healthy spouse outlives the 3-year period will be greater. This could back fire though if the healthy spouse dies first. At worst have each of them pay their own tax.

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Caution: Gifts to GST Trusts in 2010 Should be Avoided Due to Uncertainty of the GST Tax Treatments

Consider Direct Gifts to Grandchildren. Control can be Managed Using FLP’s, LLC’s or Non-Voting Stock

If client makes gifts to Life Insurance trust each year, and it has GST provisions, it would be best to either make payments with current assets from trust, or loan money to trust for 2010 instead of gift the funds

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The tax is calculated using the $1,000,000 lifetime exclusion and the 55% maximum rate.

Current Gross Estate $8,500,000Taxable Gifts pre 2009

$1,000,000

Projected estate tax $4,520,000

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Assume taxable gift made of $2,000,000 in 2010 and gift tax paid of $700,000

Gross Estate current $8,500,000 Less Gifts made in 2010 $2,000,000 Less Gift Tax paid on 2010 gift $ 700,000

Gross Estate (Assume survives3-year period) $5,800,000

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Gross Estate $5,800,000 Taxable Gifts $3,000,000 Taxable Estate $8,800,000

Projected Estate Tax (Assume sunset& 3 yrs) $3,190,000

Estate Tax Savings by prepaying tax $ 630,000

(4,520,000 – 3,190,000 – 700,000)17

If Tax Rates drop to 2009 levels at 45% Gross Estate $5,800,000 Taxable Gifts $3,000,000 Taxable Estate $8,800,000

Projected Estate Tax (Assume sunset& 3 yrs) $1,500,000

Estate Tax Savings by prepaying tax $ 500,000

(2,700,000 – 1,500,000 – 700,000)

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Straight GiftNet Gift Concept

Family pays gift tax from assets (see next page for example)

Loan from grantor to family to pay gift tax▪ August 2010 Mid-term federal rate for loans

less than 9 years is 2.18%▪ Used when client doesn’t want stock to be

sold.19

Assume same $2,000,000 gift. In the previous example the gift tax was $700,000 ($2,000,000 x 35%). If the client wants to give away a total of $2,000,000, instead of $2,000,000 plus the tax of $700,000, then the total gift tax paid goes down to $518,519. The taxable gift then is $1,481,482 (2,000,000 less 518,519)

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If the client does make a net gift, there may be some unintended INCOME tax consequences to the transaction if other than cash is transferred.

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Two Highest Marginal Rates Rise 33% to 36% 35% to 39.6%

Qualified Dividends From 15% (capital gains) to Ordinary Income –

Max Rate 39.6% Example: 4% Dividend▪ Old Law – Yield After Tax 3.4%▪ 2011 – Yield After Tax 2.4%

Consider Municipal Bonds if yield is greater

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Capital Gains 15% to 20%

Estate Tax Exemption – From $3.5 Million to $1 Million 55% - 60% Top Rate

Limitation on Itemized Deductions and Personal Exemptions Reinstated (Phase-out)

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Top Rates For High Income Filers 33% to 36% 35% to 39.6%

Itemized Deductions Capped @ 28% on High Income Filers

Personal Exemption Phase-out Reinstated

Itemized Deduction Phase-out Reinstated24

Qualified Dividends – Long Term Capital Gains 20% High Income Filers

($200,000/$250,000)

Estate Tax – 45% Top Rate $3.5 Million Exemption at death – Not Indexed

Gift Tax – 45% Top Rate $1 Million Lifetime Exemption

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Medicare Tax Extra 0.9% on Wages on Amounts Over

$250,000 (Joint); $200,000 (Single) Extra 3.8% on The Lesser of Net

Investment Income (e.g., Interest, Dividends, Capital Gains and Passive Pass Thru Entities) OR Modified Adjusted Gross Income Over the $250,000/$200,000 Thresholds

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Closely Held C Corporations Accelerate Dividends Into 2010 (Use a

Note if Cash is Limited)

S Corporations With Accumulated Earnings From Prior C Corporation Years May Want to Make a 2010 Elective Distribution

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Acceleration of Bonuses and Deferred Compensation Into 2010 [Need to be Mindful of IRC 409(A)]

Review Stock Portfolios – Options Accelerate Capital Gains to 2010 Defer Capital Losses to 2011

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“If Patrick Henry thought taxation without representation was bad, he should see how bad it is with representation.”

The Old Farmer’s Almanac

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