Tax Planning in Texas

Is Federal Estate Tax Planning Dead?

Posted by Ridge Dickey on Mon, Oct 26, 2009 @ 04:04 PM

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Some members of Congress want to see the federal estate tax dead. Even if it is repealed, we may see a change a federal income tax law, the rationalization for which is the demise of federal death taxes.

For example, as of October 26, 2009, the legislation passed in 2001 is still in effect. It provides that there is no federal estate tax on the estates of decedents who die in 2010, but it also provides a limitation on the value of the decedent's assets that receives a stepped-up basis in 2010.

Given that federal tax revenue is way down, a tax break to wealthy individuals may not be politically savy.

Hopefully Congress will pass legislation in 2009 that will remove the present uncertainty surrounding estate, gift generation-skipping taxes. The 2001 legislation reinstates the pre-2001 federal estate exemption of $1,000,000 beginning in 2011, down from $3,500,000 this year.

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Tax Planning in Texas

Reducing taxes is an integral part of the estate planning and asset protection process. The following are some examples:

Operating a business in an entity treated as a C or S corporation can have adverse income tax consequences if the corporation redeems a deceased shareholder's shares. Redemptions are sometimes used to shift ownership on the death of an older generation to one or more members of the next generation while equalizing the value the inheritance of among all the members of the next generation.
Assuming that we will have a continuation of the federal estate tax, gift tax and generation tax after 2009, basic federal estate planning will continue to take advantage of the exclusions and exemptions from those taxes toward the end of sheltering estates from those taxes.
An irrevocable trust is taxed at the highest federal income tax rate of 35% if undistributed taxable income exceeds $10,700. The tax rates are so compressed that the average tax rate below $10,700 is almost 26%. In drafting trusts, strategies should be considered that will reduce the income tax burden.

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