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Maximize your tax advantages


Despite the predictions of many pundits, Congress' "lame duck" session was productive after all: Among other accomplishments, the long-awaited tax cuts are now law, at least through 2012.

Despite the predictions of many pundits, Congress' "lame duck" session was productive after all: Among other accomplishments, the long-awaited tax cuts are now law, at least through 2012. What do the new laws mean to you? For one, an opportunity to convert IRAs to Roth IRAs, providing you and your heirs with lifetime tax-free income. In addition, your payroll taxes, income taxes, and estate taxes will all go down, enabling you to optimize your tax planning for the next 2 years.


Also, more clients are using disclaimer trusts, a form of trust that allows a deceased spouse's assets to go directly into a trust without being taxed. This strategy gives the surviving spouse additional flexibility to do post-death estate planning that takes into account the law at the time of death.

Many estate-planning documents today have a "formula" requiring the maximum tax-free amount to go into a trust for the surviving spouse and children. Following such a formula unnecessarily ties up assets and creates restrictions that no longer are necessary with the new $5 million exemption.

These changes mean that it is time to update your estate planning documents, or your spouse could end up begging a trustee for distributions. An "I love you" will, with most assets passing to the surviving spouse, now will be the best structure in most situations.

Equally important, the generation-skipping tax exemption was increased to $5 million per decedent for 2011 and 2012. This tax would apply if you are trying to avoid estate taxes on the death of your children by leaving assets to beneficiaries at least two generations below you (your grandchildren or their descendants). Also, the lifetime exemption on the gift tax has been increased from $1 million to $5 million, allowing you to get assets out of your estate through 2012.

Consequently, if you can afford to gift now, consider taking advantage of this option. And don't forget the annual gift tax exemption of $13,000 per donor per donee, which does not count in your lifetime limit.

Using grantor retained annuity trusts remains a beneficial practice because they permit you to gift assets into a trust for your children, thereby letting you enjoy ongoing distributions while removing the assets from your estate. These trusts are irrevocable and are best suited for people not inclined to change their minds.

Congress also extended the existing asset basis step-up at death through 2012. This means that the beneficiary uses the value of assets (tax "basis") at the date of death when calculating taxes on their sale, and any prior appreciation is ignored.

In the past, I usually would recommend that a physician separate assets between himself or herself and the spouse to take full advantage of the estate tax exemptions, even though many states protect assets owned by husband and wife against the creditor of either individual. But because of the portability of the credits and increased exemptions, it now makes more sense to own assets jointly with a spouse under most circumstances. Transition rules apply to deaths occurring in 2010, allowing you to use the "old rules" or "new rules." The new rules are better for estates valued at less than $5 million.

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