2010-11 Tax Plan

√Change in Venue: So your income oriented stocks were snug in your personal account where the Taxman only could tag them at a 15% rate. Bam Zap Zowie (think old Batman Shows) -- the Bush 15% tax siesta for dividends may end in 2013 and dividends may be nailed at a 39.6% rate. So dividend paying stocks may morph from tax efficient to tax costly. So, just like hermit crabs who need to find a larger shell when they want to grow, your dividend paying stocks may need to slither into your IRA or other qualified plan shell to avoid a tax rate that more than doubles. Consider this possibility as you plan investments in the coming years. Asset location is as important as asset allocation to maximize your net returns.

√Late for Supper but not for GST: So you made gifts in early 2010 to your children or trusts, but now that you know 2010 has a zero percent GST tax rate, what can you do? It might be possible through disclaimers (renouncing an interest in a gift or bequest) for grandchildren (“skip persons” in GST parlance) to become the donees or beneficiaries of certain 2010 transfers that would then be subject to a 0% GST tax rate (can’t get lower than that!). The GST rules also permit you to make a late allocation in 2011 of GST exemption to 2010 gifts. That might be a good fix. You have to act after 4/15/11. IRC Sec. 2642(g); Treas. Reg. Sec. 26.2642-2(a)(2). 

√Carryover Basis Allocation to LLCs: LLCs (and partnerships) have inside basis (LLCs’ investment in its assets that determine gain/loss if the LLC sells the asset) and outside basis (your investment in the LLC interest which determines your gain/loss if you sell). If someone died bequeathing you an interest in an LLC you might get to increase (step-up) the basis in their LLC membership interest, but that won’t cut the tax mustard unless the LLC can also give you an adjustment for the inside basis in asset it owns (otherwise if the LLC sells a building you’d still get tagged with gain). But before the executor makes an allocation to you be sure you can get the LLC manager (or partnership’s GP) to make a special tax election under Code Section 754 to adjust the inside basis. Otherwise, you might never get the benefit hoped for. If the basis adjustment for the estate is less than the gain involved confirming this in advance of filing an allocation with the IRS is key.

√Attorney Employment: Most executors hire an attorney and CPA to represent the estate and the probate process, and tax returns are handled. In 2010 with a choice of having the estate tax or the carryover basis rules apply, each beneficiary affected really needs to hire their own counsel to represent their interests. The choice may affect how assets are distributed, not just tax issues. The receipts and releases typically signed at the end of the probate process in contrast to more typical years, for 2010 estates should include attachments clarifying how the executor selected the estate tax or carryover basis (and if the latter, how the basis adjustments were allocated). 2010 is a unique year and extra measures are warranted. Estates paying no estate tax will be perplexed by more costly professional fees when there is no tax, but alas, such is the Alice in Wonderland logic of our tax system.

√Give it Away: Its not just your kid yelling give it away, your tax advisers will be joining the chorus in 2011. The $5M gift exemption creates sizzling tax opportunities. President Obama’s 2011 budget proposal already calls for a reduction in the gift exemption to $1M. Why is this so vital? ■ State Tax: For folks living in high tax states that don’t follow the federal estate tax rules (“decoupled”) giving it away before they check out could leave no assets in the state estate tax vice. Example: You have a $5M estate and live in NY which has only a $1M estate tax exemption. Give away $4M and there is no gift tax (unless Obama’s change goes through in which case this planning opportunity evaporates). On death if you’re under $1M there is no state estate tax either. If instead you do nothing, on death your $5M estate will trigger more than $400,000 in NY tax. Ouch. ■ Non-Married Partners: The gift tax has always been a tough impediment to non-married partners equalizing wealth. For most, the $5M gift exemption obviates the issue. Gift now before Congress turns the tax spigot off. ■ Asset Protection: Shifting assets into a protective structure had to plan around the $1M gift exemption. With $5M and $10M for a couple there might no longer be any tax impediment to shifting assets. Go for it while you can.

√Calendar Roth Conversion Re-characterization: Many folks converted some or all of their IRAs to Roth’s in 2010 (and others will follow suit). Don’t forget to calendar October 1, 2011 to meet with your investment adviser and CPA to determine if your Roth conversion was an investment success. If not you have until October 17, 2011 (the 15^th is a Saturday) to reconvert or recharacterize the Roth back to a regular IRA and avoid paying the income tax on the conversion of assets that declined in value post-conversion. You can also Roth an inherited 401(k). Notice 2008-30, IRB 2008-12, 638.