What’s NOT in The 2010 Tax Act

There are two key provisions that many commentators feared would be in the 2010 Tax Act, but which were not included in it.

Specifically, there have been several proposals to place limits on Grantor Retained Annuity Trusts (“GRATs”), which allow individuals to transfer wealth out of their estates with as little as a zero estate or gift tax cost that would have made GRATs less valuable from an estate planning perspective.  There have also been several proposals to limit valuation discounts in connection with certain estate planning techniques such as family limited partnerships. There were no such provisions included in the Act.  Therefore, these techniques continue to be available to move wealth to lower generations.

Temporary Relief Does Not Extend to Non-US Citizens Who Are Not Residents for Estate Tax Purposes

The Act reinstates federal estate taxes on United States-situs property of non-US citizens who are not residents.  The increase of the applicable exclusion amount to $5 million per person does not apply to non-US citizens who are not residents. US situs property exceeding $60,000 in value is currently subject to US estate taxes beginning at graduated marginal rates starting at 18 percent.  Accordingly, particular vigilance needs to be exercised in structuring the acquisition of US assets such as real property, so as to avoid imposition of US estate taxes at pre-2010 levels.

Contact our Estate Planning Lawyer in Los Angeles today to review your estate plan.

Continue to final post in blog series:

Summary of The 2010 Tax Act

Gift Taxes, GST and Misc Effects of The 2010 Tax Act

Gift Taxes

A “gift” is considered any transfer of property (real or personal) without receiving its full value in return.  For gifts made in 2010, the maximum gift tax rate is 35 percent and the applicable exclusion amount is $1 million. For gifts made in 2011 and 2012, the Tax Act limits the maximum gift tax rate to 35 percent and increases the applicable exclusion amount to $5 million.   As discussed below, this change provides an opportunity to move significant amounts of wealth free of estate and gift taxes.

Donors continue to be able to use the annual gift tax exclusion before having to use any part of their applicable exclusion amount. For 2010 and 2011, the annual exclusion amount is $13,000 per donee (married couples may continue to “split” their gift and may make combined gifts of $26,000 to each donee).

Generation Skipping Transfer (“GST”) Tax

The Act provides a $5 million GST exemption amount for 2010 (equal to the applicable exclusion amount for estate tax purposes) with a GST tax rate of zero percent for 2010. For transfers made after 2010, the GST tax rate would be equal to the highest estate and gift tax rate in effect for the year (35 percent for 2011 and 2012). The Act also extends certain technical provisions under prior law affecting the GST tax.

Miscellaneous

The Act also extends through 2012 several modifications enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

These include:

  • Expanding the availability of installment payments for estates with interests in qualified lending and finance business;
  • Clarifying installment payment provisions, requiring that only the stock of the holding companies, not that of operating subsidiaries be nonreadily tradable.  (Estates taking advantage of these two provisions would have to make the required payments over five years rather than fifteen);
  • Expanding the availability of estate tax installment payments by broadening the definition of an interest in a closely held business; and
  • Allowing a deduction of estate taxes paid to any state or the District of Columbia for decedents dying after December 31, 2009.

The Act further grants extensions of time for the filing of a tax return for certain estates, making tax payments, or making a disclaimer with respect to an interest of property passing by reason of the decedent’s death.  In the case of an estate for a decedent dying after December 31, 2009, and before the Act’s date of enactment, the due date for this compliance will be the date nine months after the date of enactment.

Contact our Estate Planning Attorney in Los Angeles to review your estate plan today.

Continue reading blog series:

General Observations Regarding The 2010 Tax Act

The Tax Benefits of Incorporation to the Entertainer (Part 2)

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This is the part 2 of the second section of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question” regarding the tax benefits of incorporation to the entertainer.

The only difference between a corporation and an individual taxpayer is the application of the rate of tax to the taxable income.” Section 1(c) applies to the individual taxpayer and requires taxation at the highest level of 39.6%. Section 11, which applies to the corporate taxpayer, requires taxation at the highest level of 35%. While it may seem that the 4.6% difference in maximum taxation rates is inconsequential, the §1(c) rate of 39.6% is applied to taxable income over $250,000. The §11 tax rate of 35% is applied to taxable income exceeding $10,000,000.

The foregoing analysis, though, is altered when applied to a personal service corporation (“PSC”) (also known as a loan-out corporation). Section 11(b)(2) states that the qualified PSC will be taxed at a rate of 35%.  “The [Internal Revenue] Code provides for the taxation of the taxable income of certain personal service corporations at the highest corporate [tax] rate, thereby depriving these corporations of the benefit of lesser, graduated tax rates on taxable income not in excess of $75,000″ (Ness and Vogel, 1991).  The corporation with very little taxable income will be taxed at the same rate as large corporation with a large amount of taxable income. Section 11(b)(2) only applies to those PSCs that are qualified as defined by Internal Revenue Code § 448(d)(2).

Therefore, a corporation which is substantially involved in the performing arts (among other specified industries, including accounting, law, and engineering), and where substantially all of the stock in the corporation is held either directly or indirectly by an employee performing the services in which the corporation is substantially involved, then the corporation is a qualified PSC.

* For specific inquiries regarding a tax planning legal matter that you may have, you are welcome to visit our Woodland Hills Tax Lawyer services page.

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