2011 Year End Estate, Gift and Income Tax Alert

As the 2011 year end approaches, it’s a good time to review recent changes in tax laws that may help save your family gift, estate and income taxes.

Estate, Gift and Generation Skipping Taxes

For 2011 and 2012, the estate, gift and generation skipping exemptions were unified and the tax rate was lowered. For 2011, the exemption amount is $5,000,000 per person. The exemption amount increases to $5,120,000 in 2012. The tax rate in 2011 and 2012 is 35%. Barring action by Congress prior to the end of 2012, the estate and gift tax exemption will be reduced to $1,000,000, the generation-skipping exemption will be reduced to approximately $1,300,000, and the maximum tax rate will increase to 55% beginning in January of 2013.

There have been rumors in the tax community that the “Super Committee” of 12 members of Congress tasked with reducing the deficit may include a change in the gift tax exemption from $5,000,000 down to $1,000,000 when the Committee makes its recommendations to Congress, which it must do by November 23, 2011 (the day before Thanksgiving). With the gift tax exemption of $5,000,000, plus lower asset values, and a low interest rate environment, many clients have considered making large gifts this year or next, but many have deferred that decision. If the Super Committee recommends lowering the gift tax exemption to $1,000,000, this opportunity could be lost as early as November 23, 2011. Therefore, if you have been considering making larger gifts, the time to act may be now.

The annual gift tax exclusion (the amount you can give to any number of individuals) is $13,000 in 2011 and remains $13,000 for 2012. If you haven’t made your usual annual exclusion gifts to children and grandchildren, you may want to do so before year end.

If a taxpayer died after December 31, 2009, and before December 18, 2010, the taxpayer’s personal representative may elect out of the estate tax regime if doing so is determined to be more beneficial from a transfer tax perspective. If elected out, the taxpayer’s heirs use a carryover basis regime, with certain adjustments allowed. The form required to make the election out of estate tax is due on January 17, 2012.

Individual Retirement Accounts

If you are over 70 ½ and have an individual retirement account, you must take minimum required distributions (“MRD”), whether you need the money or not. If you are charitably inclined, consider making a direct donation of your MRD from your individual retirement account (“IRA”) to a public charity. This must be done before December 31. Contact your IRA Trustee to arrange this type of distribution.

If you converted a regular IRA to a Roth IRA in 2011, you must pay income tax on that conversion. If the amount in the now Roth IRA has reduced from the beginning of the year (especially in light of the market reductions in the third quarter), you may want to recharacterize the Roth IRA back to a regular IRA. Because there must be at least 30 days between a recharacterization and another conversion, if you want to convert the IRA back to a Roth IRA in 2012, you may want to do the recharacterization from Roth IRA back to regular IRA prior to the end of November.