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.