How Much Should 40 Year Old Have In A 401 Tax Law Changes Create Planning Opportunities

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Tax Law Changes Create Planning Opportunities

How can inheritance tax affect your family? In 2008, the Dow fell 33.8%, the S&P 500 fell 38.5%, and the Nasdaq fell more than 40%. It was a bad year. Imagine feeling the effects of last year’s losses in a single day. With federal estate tax rates ranging from 37% to 45%, your family could lose more in a single day than during the storm we experienced in 2008. Good planning is essential, and the economic environment Current and recent changes in the law offer tremendous opportunities to minimize taxes.

Estate tax and GST exclusion amounts increased to $3.5 million

Effective January 1, 2009, the applicable exclusion amount for federal estate tax and skipped generation transfer tax was increased from $2 million to $3.5 million. The top federal estate tax rate remains at 45%.

With the economy showing few signs of improving, the combination of lower asset values, lower interest rates and the prospect of inheritance and gift tax reform present an opportunity unique for estate planning techniques that can generate significant tax savings. Many commentators predict that Congress will pass an estate tax reform program in 2009 that, while beneficial to some, could impose a heavy burden on others. Now is the time to capitalize on the tax planning techniques that are still available and extraordinarily effective in today’s economic conditions.

Discounts for family limited partnerships

New legislation has been introduced in Congress to eliminate discounts that may be available for donations of partnership assets. Plans involving such an entity should be implemented or reviewed as soon as possible to help ensure that donations will be “grandfathered” under applicable law.

Annual gift tax exclusion increased to $13,000

The annual gift tax exclusion, which is the amount donors can give to individuals and certain trusts each year, has been increased from $12,000 to $13,000. The annual gift tax exclusion gives individuals the opportunity to transfer assets and reduce the size of their taxable estate without incurring tax liability. The increased amount, coupled with lower asset values ​​resulting from the current economy, provides a unique chance to maximize the benefits of tax-free donations.

Increase in contribution limits for pension plans

Many pension plan limits have changed for 2009 due to the increase in the cost of living index. Effective January 1, 2009, the limit for optional deferrals to 401(k) plans has increased from $15,500 to $16,500, and the limit for total annual allocations to defined contribution plans for participants under age 50 is went from $46,000 to $49,000. “Catch-up contributions” for people age 50 or older have been increased from $5,000 to $5,500. There is no change to the limit on the amount an individual can contribute to an IRA, which remains $6,000 for those born before 1960 and $5,000 for those born after 1960.

Required minimum distributions suspended for 2009

Typically, retirement account holders and participants are required to begin receiving annual minimum distributions no later than April 1 of the year following the year they turn 70½. However, the Worker, Retiree, and Employer Recovery Act of 2008 suspends Required Minimum Distributions (“RMDs”) for 2009 only. Anyone aged 701/2 or older in 2009 does not need to take a 2009 RMD until April 1, 2010, but must still take a 2010 RMD.

The stay allows taxpayers to forgo all or part of their required 2009 distribution without penalty, creating an opportunity to reduce 2009 taxable income. In addition, they can avoid liquidating investments in a bear market. Without the suspension, participants could be forced to sell investments at a loss to make the required distribution or face a 50% tax penalty on the amount that should have been distributed.

Historically low rates and depressed real estate markets

Settlor-retained annuity trusts or “GRATs” are trusts used to make future gifts of appreciating assets to children and grandchildren on a virtually tax-free basis. Current historically low interest rates make it more likely that trust assets will appreciate at a faster rate than the current “applicable federal rate” or AFR, and excess appreciation transfers to children and grandchildren in tax free. However, changes to the Internal Revenue Code may eliminate gift tax-exempt GRAT planning. Here again, unusual opportunities exist and must be seized quickly.

A Charitable Lead Trust or “CLT” is a trust that pays an amount to charities that you choose and then, after a period of time, the principal is paid out to your family. These trusts can minimize any gift or estate tax while providing you (or your estate) with a current charitable deduction. The current climate of low interest rates makes CLTs very attractive.

Low real estate values ​​make this a good time to consider a Qualified Personal Residence Trust or “QPRT”. A QPRT is a trust that holds a primary residence or vacation home for a set period of years. QRPTs can be used to reduce the size of a taxable estate, while keeping the property in the family.

The current economic environment and recent legal developments offer rare opportunities for tax savings, but these opportunities won’t last forever. It is important to review your plan now to take advantage of these benefits.

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