Which is far better than lemonade. Here are some things that are likely to happen soon.

The new administration is still more than a month away, but there are definite ideas about what might be proposed and implemented next year. Some of those changes involve estate-planning issues. Legislation that is proposed some time next year can be made retroactively effective to Jan. 1, 2009. It seems likely that there will be legislation to fix the estate tax craziness that was enacted in 2001 ($3.5 million exemption in 2009, no tax in 2010, $1 million emption in 2011). One method of fixing the problem is to continue the tax in effect permanently at the current flat rate of 45 percent, with an exemption of $3.5 million, the 2009 amount. The problem with that solution is that it brings in a lot less revenue than the $2 million exemption in effect this year. An alternative is to leave the exemption amount at $2 million until our budget deficits fall below a trillion.

In addition to changing the estate tax exemption or the rate of tax, or both, it’s possible to affect the tax collected by changing the law on what’s included in the taxable estate. One of the largest increases in the estate tax base took place during the Reagan administration, when retirement benefits were subjected to estate tax. Some suggestions are now being heard in Washington, ideas that have been percolating for a while and that address someone’s notion of tax fairness.

One proposal that has been discussed relates to transfers of family limited partnership interests. Because these kinds of assets are not publicly traded, a practice has developed of discounting the underlying value of the partnership assets when a transfer, such as a gift, takes place. Percentage discounts are a matter of opinion, and the IRS has been concerned that these discounts are not valid in every case. We are likely to see a proposal to end these kinds of discounts, especially where the partnership assets are investment assets, as compared to an operating business.

Another technique that has been extremely popular for many years is making gifts by taking advantage of the unfortunately named Crummey powers (Crummey refers to the name of a successful litigant against the IRS). Crummey withdrawal rights, which are almost never exercised, permit gifts that are not outright transfers to come within the gift tax annual exclusion ($12,000 this year, $13,000 next year). The IRS has never liked this concept, and may use the circumstance of the large budget deficits to propose its discontinuance.

Other suggestions made include cutting back on other discounted gift techniques, such as grantor retained annuity trusts and qualified personal residence trusts. It’s possible to maintain the fiction that you haven’t raised taxes by cutting back or eliminating these techniques, since they don’t change tax rates. Many practitioners are trying to close as many transfer transactions as possible this year, to avoid greater restrictions that could affect the ability to do estate planning next year. We’re entering a time of change, and those practitioners who are knowledgeable on the opportunities created by that change will prosper in the next four years.

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