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Estate Planning Urge People to Make Gifts in 2010 to Minimize Tax

This year could provide a once-in-a-lifetime opportunity to make any large gifts to loved ones, according to many estate planning lawyers. They key point: Gift taxes are at their lowest point this year than at any time since the Great Depression, and they're scheduled to jump next year. For gifts made in 2009, the highest tax rate was 45 percent. This year, the top gift tax rate is at 35 percent -- and next year it will rise to 55 percent.

Unfortunately, many people still reeling from the economic downturn are reluctant to make gifts this year, which could cost them or their heirs a lot in extra taxes.

"Many advisers don't want to suggest to a client that they pay a big tax bill before they have to. They like to pretend they can use their magic to minimize taxes, but that never works," said estate planning attorney David Handler of Kirkland & Ellis in Chicago in a recent interview with Reuters.

This year is also unusual in that certain penalties were reduced for investors who convert traditional IRAs to Roth IRAs. Although the investor does have to pay taxes on the funds at the time of the conversion, the overall tax savings can be substantial for many people. Handler hopes their experience with the IRA conversion will make it easier to see the benefits of scheduling large gifts during fiscal year 2010.

"They're paying taxes now to save taxes in the future. It's the same concept," he told Reuters.

2010 Gift Tax Window Could Offer Substantial Benefits

"Everyone is scared they're going to run out of money," said Deerfield, Illinois, financial planner Sue Stevens in the Reuters report. "But I tell them that, with rates going up, this is a pivotal year for tax planning and we need to be thinking of every opportunity."

Every year, each individual is allowed to make gifts of $13,000 or less to friends and loved ones without tax. (Although, if you give more than $1 million of otherwise taxable gifts during your lifetime, however, you could still owe tax.)

Since the federal gift tax is paid by the person giving the gift, choosing to make a gift instead of leaving the same amount of money in your will allows your beneficiary to receive the entire amount you intend to give. If the gift tax is lower than the estate tax, less taxes overall are paid.

When thinking about the difference, keep in mind that even though gift and estate tax rates are often the same for the same year, you're talking about events in different years. For example, if you give a gift in 2010 and end up having to pay a 35 percent tax on a portion of it, that's still much lower than the 55 percent estate tax that would be owed if you left the same amount as a bequest and died in 2011.

While the economic downturn can make it hard even to consider writing a large check to Uncle Sam, if you plan to transfer the assets at some point, doing so as a gift this year could be a historic opportunity. The historic tax savings could make your gift much more impactful.

Related Resource:

"WEALTH MANAGER - Time running out to exploit gift tax break" (Reuters, June 7, 2010)

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