In 2009, a couple can transfer up to $7 million without having to worry about their estate paying any estate taxes on the death the surviving spouse ($3.5 million per person.)  Remember, the estate tax is supposed to go away in 2010 and then sunsets to the old law of allowing a couple to be able to transfer assets of $2 million estate tax free ($1 million per person) in 2011.  In 2008, a couple could transfer up to $4 million.

No one really knows what Congress is going to do about the estate tax.  At an advanced tax seminar that I attended in October, most commentators discussed Congress extending the current law to 2010 as the most likely outcome.  This way Congress will not have to deal with any estate tax legislation this year given the current legislative priority for health care, clean energy and education.

Unfortunately, because of the record deficits, the estate tax will be still around.  It is merely a question of whether a couple will be able to transfer $4 or 7 million of their assets estate tax free.  That means that between 98 and 99% of the country may not be subject to estate tax.

When I have this discussion with my clients, I mention that planning will still continue in order to protect their assets and shift income to heirs.  Today, $4 or 7 million is still a lot of money even in this depreciated real estate market (that may have finally reached the bottom.)

Estate Planning.
The first newsletter topic deals with the fact that in order to transfer the $4 or 7 million to their children, clients will have to establish the typical family trust that provides for the first $2 or 3.5 million to be transferred into a decedent’s trust.  I recommend that the decedent’s portion of their estate should allow the flexibility having the surviving spouse be able to change how the distributions to their children will be if there is a change in circumstances after the death of the first spouse.  Unfortunately, this type of planning is not provided for in some family trust documents that I have reviewed.

What else should you be thinking about, if you have substantial assets that will not be subject to estate tax either because of total repeal of the death tax (good luck) or more than likely your estate may be under the exemption amount? What are the various planning tools to use in this environment?

Wealth Management.
If wealth preservation is a key motivator for you and protecting heirs at the same time, using a limited partnership or limited liability company will certainly be one tool.  This is particularly true where real estate is a major asset.  Various types of trusts will also be something to explore.

Income Shifting Strategies.
An individual who is funding benefits or obligations (e.g., college tuition or support costs) for someone (e.g., a college age child or a parent in a nursing home) who is in a lower income tax bracket should consider adopting approaches by which the ordinary income or capital gains of the individual are shifted to the lower tax rate taxpayer. There are a number of methods for accomplishing this task, including the following:

1. Trusts can be created to hold income-producing assets; the trust income is allocated among the beneficiaries based on the trustees’ discretion.

2. The transfer of noncontrolling interests in flow-through entities (e.g., limited liability companies (“LLCs”), partnerships, and S corporations) may be used to shift income to lower-bracket family members without giving up control over the underlying asset or the family business. However, for most individuals, the federal estate tax issues surrounding family limited partnerships (“FLPs”) will become moot. FLPs remain an excellent tool for maintaining control of an asset, while income earned from the asset is allocated to lower-bracket family members.

3. A business could hire family members to work in the business. However, if the business owner has earned income over $90,000 (in 2005), then this approach could create Social Security taxes which the business owner would not have incurred.

Conclusion.
Benjamin Franklin said that only taxes and death are inevitable. As long as we have taxes, tax avoidance will remain an important motivation for many people.  This does not mean that planning does not continue on in preserving and protecting your assets.

D. Michael Trainotti has a general tax practice in Long Beach which emphasizes real estate, closely held businesses and estate planning matters. He has a master’s degree in taxation and is a member of the tax sections of the State Bar of California dealing with real estate, pass-through entities and estate planning. He is also a member of the same tax sections of the Los Angeles County Bar Association and the American Bar Association. Mr. Trainotti would be pleased to hear from you regarding  future topics of interest or comments on this article. Please contact him directly at his office at (562) 590-8621 or by e-mail at mike@trainotti.com. You can also visit his website at http://www.trainotti.com

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