Not All Sunsets Are Beautiful

Aloha to those tax cuts enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). If Congress does nothing, these tax cuts sunset at midnight on December 31, 2010. Anti-Business and Family laws in place before EGTRRA will kick back in. We will lose enhanced capital gains and dividends tax rates in the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) as it also sunsets after December 31, 2010.

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So, for Estate & Wealth Planning, what is the Internal Revenue Code going to look like after EGTRRA's and JGTRRA's tax benefits sunset after December 31, 2010?

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The Senate may seek an extension of the EGTRRA tax cuts for one or two years, rather than permanently. However, the Senate has a short time in which to act.

FACE THE SUNSET: Two good non Estate Planning things to do and some impacts in light of the EGTRRA Sunset.

• Convert to a Roth IRA in 2010. This gives the taxpayer the option of recognizing the conversion income in 2010 or pro-rata over 2011 and 2012 under existing rules.

• Coverdell Education Savings Accounts Under the sunset provision of EGTRRA, the annual contribution ceiling to a Coverdell ESA reverts to 0 for tax years beginning after December 31, 2010, and distributions from a Coverdell ESA will no longer be allowed to pay elementary and secondary education expenses, apparently irrespective of when the funds were contributed.

Taxpayers with a large amount of unused funds in Coverdell ESAs may roll over these amounts into a 529 college savings plan. EGTRRA's taxpayer friendly revisions to 529 plans, which were scheduled to sunset after December 31, 2010, were made permanent by the Pension Protection Act of 2006. BE CAREFUL THOUGH you might be subject to a second set of sales charges for small accounts which are not eligible for any sales charge discounts.

FED ESTATE, GIFT AND GENERATION SKIPPING TAX SUNSETS

Some of EGTRRA's most advantageous reforms were to the federal estate, gift and generation-skipping transfer (GST) tax rules. EGTRRA repeals the federal estate tax but only for decedents dying during calendar year 2010. After 2010, the 2001 EGTRRA estate tax provisions, with significantly higher tax rates, are probably going to return because it doesn't look like Congress is going to act.

Estate Tax Exemption

What is the "applicable exclusion amount?"

The Internal Revenue code ("IRC") provides that a certain amount of every decedent's estate is exempt from the estate tax.

Under EGTRRA, the applicable exclusion amount for federal estate tax purposes is .5 million for decedents dying during 2009.

When and if EGTRRA sunsets, the applicable exclusion amount for decedents dying after December 31, 2010 regresses back to the before EGTRRA level of million. Yeah, that's US Dollars! This means that almost every person who owns a house in Hawaii, California or New York City will pay Estate Tax unless they have Estate Planning.

Gift Tax Exemption

EGTRRA provides for a million gift tax exclusion beginning with gifts made in 2002.

Upon EGTRRA sunset, the applicable gift tax exclusion amount will remain at million.

Qualified Family Owned Business Deduction

Before EGTRRA, the IRC allowed a deduction from the gross estates of individuals holding certain qualified-family-owned-business-interests (QFOBIs). EGTRRA repealed the deduction for qualified family-owned businesses interests for decedents dying after December 31, 2003.

Under the sunset provision of EGTRRA, the deduction for QFOBIs comes back into play. This means that the qualified heir must be sure to meet material participation requirements.

State Death Tax Credit

Under the sunset provision of EGTRRA, the state death tax deduction terminates and the state death tax credit revives for the estates of decedents dying after December 31, 2010. Also the GST credit will be restored for GST taxes paid to a state following a GST (not a direct skip) that occurs as a result of the death of an individual after December 31, 2010.

Income Tax Exclusion for Sale of Principal Residence

A single individual generally may exclude from income up to 0,000.00 of capital gains (0,000.00 if married filing jointly) from the sale or 1031 exchange of a qualified principal residence. Usually 2 consecutive years of principal residency in the past 5 years.

Under the sunset provision of EGTRRA, the capital gains income tax exclusion for the sale of a principal residence will no longer be applicable to a decedent's principal residence sold by the decedent's estate. Ouch!

Estate and Gift Tax Rates

While the estate tax is repealed entirely for decedents dying in 2010, under the sunset provision of EGTRRA, the max fed estate tax rate reverts from 35 to 55 percent for decedents dying after December 31, 2010. The maximum gift tax rate also reverts to 55 percent.

Generation-Skipping Transfer Tax (GSTT) Sunsets

Some significant GSTT reforms will sunset after December 31, 2010:

• EGTRRA's deemed allocation rule applicable to indirect skips.
• EGTRRA provision for retroactive allocations.
• Qualified Severing of trusts for GSTT purposes.
• No relief will be available for a transferors who inadvertently fail to allocate GSTT exemption on a timely filed gift tax return after December 31, 2010.

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Not All Sunsets Are Beautiful

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