Well it finally happend — something that I never thought I would see.  No, my kids didn’t clean up their rooms without being asked – something even more remarkable. Congress has allowed our federal estate tax to expire. There have been an abundance of articles written on this issue in the last few weeks and I have been delaying this newsletter in hopes that I would be able to bring you some “hot off the press” discussion of new tax legislation. Congress is simply not cooperating with me.

So what is all the big talk on this estate tax repeal? Under the current law, anyone dying in 2010 is not subject to estate tax, no matter how large their estate. However, it is widely believed that Congress will enact legislation which will reintroduce the tax retroactive to January 1 of this year with an exemption yet to be determined but likely equal to the amount which was available in 2009 ($3,500,000). If Congress doesn’t act, then in 2011 the estate tax will return with a vengeance; the law will revert to what existed in 2001 with top rate of 55% and, more importantly, a reduction in the exemption to $1,000,000.What does this mean for you or your friends or clients? Today is a good day to die. However, I am not suggesting that as a prudent estate plan. My advice is that you all continue to pay attention to the headlines to see what action Congress may take. For most of you there should be no immediate need to modify your estate planning documents, but it is important to understand how the ground rules may change in this area of tax law. When we have some definitive action from Congress, I am sure I will have something more to say.

Any of you paying attention to this estate tax repeal saga will note that I haven’t mentioned “carryover basis” rules. When Congress gave us this 2010 estate tax repeal, it included a little surprise income tax increase by changing the way capital gains taxes are determined for heirs of a decedent’s estate. Imagine that. I will spare you all of the ugly details, but if you want to know more, a quick internet search will give you plenty of bedtime reading.

While I am on the subject of taxes, I do want to mention one other income tax change that might be of interest. As of January 1 all of you can convert your traditional IRA’s into a Roth IRA. Previously this conversion option was subject to annual income limitations, but those limitations have been eliminated. With a Roth IRA your assets grow tax-free and your distributions during retirement will be tax-free. A traditional IRA gets you the same tax-free growth but distributions are subject to tax. The trade off here is that the conversion to the Roth will generate an immediate income tax liability based on the value of the assets converted. So the choice is to pay tax now or pay later. If you believe that your tax rates will be higher in retirement then that weighs in favor of converting now. However there are many variables that impact this decision, including future changes in tax laws and whether you have other sources of liquidity to pay the current tax liability, so I encourage you to talk to your tax advisors about this planning option. Also keep in mind that Congress really wants you to convert in 2010 and the law includes special rules that will allow you to defer payment of your income tax over two years. This makes the conversion option a lot more attractive. Remember the show Let’s Make a Deal…I hope we all pick the correct door!

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