A Unique Opportunity

The new tax law (2010 Tax Relief Act) creates an once-in-a-lifetime planning opportunity that ends at midnight, December 31, 2010.

 

Generally, transfers (greater than $13,000 per year) to generations younger than children are subject to what is known as the generation-skipping transfer tax (GSTT), an onerous tax equal to the maximum gift or estate tax rate.  The purpose of this tax, enacted in the late 1980s, is to prevent wealthy individuals from transferring assets to younger generations for the purpose of avoiding application of the estate tax at every generation.

 

The 2010 Tax Relief Act creates a unique opportunity to make gifts through December 31, 2010 that are not subject to the generation-skipping transfer tax.  This is because, under the new law, the tax rate is zero for any generation skipping transfer made in 2010. Beginning January 1, 2011, the tax rate for these transfers with be 35%.  In two short years the rate goes back to 55%.

 

There are three common scenarios offering planning opportunities.  First, make gifts before December 31, 2010 to Skip Trusts.  These are trusts that you create for grandchildren, great grandchildren or more remote generations.  There will be no generation skipping transfer tax.  The gift tax is 35%, after use of the $1 million lifetime gift exclusion.  This strategy is most effective for large taxable estates.  On the gift tax return, you will want to elect out of automatic Generation Skipping Transfer (GST) allocation rules.  For 2010, you will allocate nothing to the GST Exemption because there is no estate tax.  Use a Trust Protector with the power to add beneficiaries (e.g. children/spouse).

 

The second planning scenario deals with the unique planning opportunities for those who are beneficiaries of trusts that will be subject to GSTT upon distribution from the trust.  Distributions should be made from these trusts before December 31, 2010 because the tax rate is 0%.  After this year, the distribution will be subject to at least a 35% tax rate.  Sometimes, there is concern about beneficiaries getting outright distributions.  Some of these concerns may be alleviated if the trustee invests trust assets in limited partnerships or limited liability companies (LLCs) and then distributes the partnership interests or LLC membership interests.

 

The third planning opportunity deals with clearing any loans made to trusts.  The most common scenario involves Irrevocable Life Insurance Trusts.  Until the passage of the 2010 Tax Relief Act, there was no way to allocate the GSTT exemption, so loans were used.  With the new act, you can now allocate the GSTT exemption on a timely-filed gift tax return.  If you unwind the loans now, you can save the 2010 annual exclusion that would otherwise be lost.

 

I strongly encourage you to take advantage of this rare gift from Congress and consider making transfers to generations younger than children, even if you do not yet have grandchildren.  We can help you structure these gifts so that they meet your goals and objectives, regardless of amount.

Health Insurance for Adult Children? Not so fast…

In late April I blogged about the new health reform law that goes into effect Sept. 23 allowing parents to keep an adult child on their health plan until age 26. But, what many people – my wife and me included – did not realize is that the new rules allow employers to wait until the start of the next plan year (typically January 1) before allowing parents to add adult children to their coverage.

We discovered this while looking into a short-term insurance policy for our 24-year-old son who is impacted by this law. We were quite surprised to learn the law is different than we first thought.

The period of time during which the new graduate will not have health insurance could be longer than first anticipated. Check with your insurance company or the administrator of your insurance plan to see if they are offering coverage during this gap. Even before the new rules kick in, many insurers are allowing graduating students to remain on their parents’ policy, but if your graduate will be dropped upon graduation, be sure to get a short-term insurance policy for them to cover the gap. Health insurance for young adults is relatively inexpensive. A policy with a high deductible for someone in their 20s can cost less than $100 a month in Wisconsin.

Health Care Reform: Health Insurance for Adult Children to Age 26

Effective September 23, 2010, the Patient Protection and Affordable Care Act requires group health plans and health insurers (who offer group or individual policies which cover dependents) to cover adult children on a parent’s plan until the child’s 26th birthday.   This has been trumpeted recently in the press, but there are a couple of things you need to know.

The child does not have to be a student or a dependent for tax purposes.  The insurance is not taxable to the child.  The term “adult child” for purposes of this requirement means a son, daughter, stepson, stepdaughter, or legally adopted or eligible foster child of the employee or insured. If your adult child has a child, there is no requirement to make coverage available to your grandchild.  Until 2014, this is only applicable to children who are not otherwise eligible to enroll in an employer-sponsored health plan.  If they are eligible, then they must use that insurance plan.

That it doesn’t go into effect until September presents problems for families with spring graduates.  There will be a period of time during which the new graduate will not have health insurance (between graduation and September 23rd).  Check with your insurance company or the administrator of your insurance plan to see if they are offering coverage during this gap.  Some insurance companies and plans are offering coverage because they are realizing the hassle and cost of dropping the new graduate and then re-enrolling them on September 23.  If your graduate will be dropped upon graduation, then be sure to get a short-term insurance policy for them to cover the gap.  Don’t take the risk.

Many states have existing laws which require insured plans to provide similar or more expansive coverage of dependents.  This new federal law will not change them and they will continue to apply.  Wisconsin is not one of those states.