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Financial Planning > Tax Planning

With Taxes In Flux, Draft Plans Flexibly

By Staff Writer

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The gift, estate, and generation-skipping (GST) taxes are in a state of change. Some changes are already scheduled and more may be coming. It is unclear when, if or how Congress will act with regard to repeal of the estate and GST tax in 2010 and return to earlier tax rates, unified credits, and exemptions in 2011.

The gift tax annual exclusion is $12,000 in 2007 and 2008. The gift tax unified credit applicable exclusion amount is $1 million in 2007 and future years. The gift tax rates range from 41% to a top rate of 45% in 2007 through 2010. In 2011, the gift tax rates range from 41% to 55%.

The estate tax unified credit applicable exclusion amount is $2 million in 2007 and 2008, $3.5 million in 2009, and $1 million in 2011. The top estate tax rate is 45% in 2007 through 2009, and 55% in 2011. The estate tax is repealed for one year in 2010.

The GST tax exemption is $2 million in 2007 and 2008, $3.5 million in 2009, and $1 million (as indexed) in 2011. The GST tax rate is 45% in 2007 through 2009, and 55% in 2011. The GST tax is repealed for one year in 2010.

Of course, Congress could change any of this. In light of this, what planning can be done now and in the near future?

Make annual exclusion gifts ($12,000 per donor/donee in 2007 and 2008) and gifts which don’t exceed the gift tax unified credit applicable exclusion amount ($1 million). Gifts not sheltered by the annual exclusion or the unified credit may require payment of gift tax. An individual paying gift tax now runs the risk that if the gift were not made it could be sheltered by a larger unified credit or taxed at a lower rate, or escape estate tax completely. Zeroed out GRATs might also be used here.

Draft flexibly. Provide for successor beneficiaries if a disclaimer or a QTIP election/nonelection is used to redirect property. Provide spouse with broad interests in a credit shelter trust (e.g., income interest, discretionary distributions and limited powers of appointment). Draft flexibly with regard to the unified credit or estate tax status at death and consider placing minimum or maximum caps on amounts passing in certain ways.

For example, under current law, a straight credit shelter trust funding provision might place $2 million in a credit shelter trust in 2007 or 2008, $3.5 million in 2009, either $0 or the entire estate in 2010, and $1 million in 2011. The amount of the marital portion could also swing wildly. Draft flexibly to obtain desired results.

William J. Wagner is senior associate editor of Tax Facts, a publication of the National Underwriter Company.

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