Morningstar Advisor - October/November 2010 - 33

are likely to significantly appreciate in value. “Real estate is a great thing to give now, and undervalued stocks. Get them out of your estate now—and give your children the appreciation without the estate tax.” The wealthiest clients don’t need to go so far as to die to take advantage of one of this year’s tax quirks. Those who plan to give more than $1 million to someone other than a spouse will incur a gift-tax rate of the highest individual income-tax rate, which is only 35% this year. That may not sound like a great deal, but the tax was set at 45% in 2009 and is bound to increase along with top marginal tax rates in 2011. “As we get to the end of the year, it basically comes down to one thing: make significant taxable gifts,” asserts Matthew Bresette, an attorney with Nutter McClennen & Fish in Hyannis, Mass. “It may not be an easy thing do, but you can put money in a trust for your children.”
Pay Income Taxes Now

that if a client hasn’t already retired, his or her own personal tax rate still might well be lower in the future. And don’t forget to factor in the possibility of triggering the Alternative Minimum Tax. Even if the numbers suggest that converting to a Roth will create long-term tax savings, doing so is not necessarily practical, says Gregory Herman-Giddens, an attorney and certified financial planner based in Chapel Hill, N.C. Does the client have enough cash on hand to pay the taxes up front—and is that the best use for his or her money? That said, Herman-Giddens touts Roths as wonderful estate-planning tools. If a client wants to pass some retirement savings on to heirs, a Roth IRA is a superior way to save, because minimum distributions are not required at any age. Beneficiaries (other than spouses) must take minimum distributions depending on life expectancy, but all their withdrawals will be free of federal income tax. Because inherited IRAs are not protected from creditors, Herman-Giddens recommends setting up a stand-alone IRA trust.
Skip Out on the Generation-Skipping Tax

termination until we know what the law is going to be.” Robert Hamilton, of Hamilton Thies & Lorch in Chicago, agrees. “You don’t want to terminate a trust now and find in November that Congress has decided to enact a generationskipping tax and make it retroactive to the beginning of this year. We may see a lot of activity during the last two weeks of December, as clients decide to terminate.” Some clients may choose to forgo the tax benefits, though. “If you are going to terminate a trust to beat the generation-skipping tax, you need to give the money to the beneficiaries outright,” Hamilton says. “Are you giving money that the donor never would have wanted to go to people this young? Beware of letting the tax tail wag the dog.” This one-year hiatus from the generationskipping tax does have one drawback: There is also no generation-skipping tax exemption. Hamilton explains, “Many of our estate-planning strategies revolved around creating irrevocable trusts while someone was living and making them exempt from the generation-skipping tax. In the 2001 tax cuts, the generation-skipping exemption was made equal to the estate-tax exemption.” With no estate tax this year, there is no estate-tax exemption, and so no generationskipping-tax exemption. Consider someone who dies this year, having created what she expected would be a generation-skipping tax-exempt trust to be funded by her estate: How much can be put into the trust if there is no exemption this year? It’s possible that the trust won’t even be considered exempt when the generationskipping tax returns. “This situation makes some gift strategies difficult if not impossible to execute this year,” Hamilton says.
Grab a Short-Term GRAT While You Can

As of 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of adjustable growth income. Paying taxes up front might be painful to contemplate, but now just might be the best time to do it. For one thing, many IRA balances have yet to rebound from market lows—and lower balances mean lower tax bills upon conversion. What’s more, your taxable estate is reduced by the amount of the tax bill. Abendroth advises clients to convert to a Roth “if it makes sense from an income-tax standpoint, because you’d pay the income tax on a pre-estate-tax basis that someone might pay later on an after-estatetax basis.” Those who do convert to a Roth have the option of paying some of the taxes in 2011 or 2012. They shouldn’t put it off. “Income taxes are almost certain to go up in 2011 [when the Bush tax cuts expire],” Abendroth says, “so anyone who can control the timing of income should take it this year.” Remember, however,

Clients lucky enough to be the beneficiaries of generation-skipping trusts have a tax-free ticket out this year. These trusts were set up to benefit grandchildren or later descendents; by skipping a generation, the trusts also skip estate taxes for a generation. They are generally subject to a tax when terminated, however—but the generation-skipping tax expired along with the estate tax in 2010. This creates a significant opportunity to terminate such trusts and distribute the assets to the grandchildren tax-free. Abendroth advises clients to proceed cautiously. “The question of retroactivity makes planning complicated. We are using a formula along the lines of ‘we are distributing to grandchildren the maximum amount that can be distributed without a generationskipping tax.’ We won’t fully complete the

A grantor retained annuity trust, or GRAT, could be a particularly useful tool for clients looking

MorningstarAdvisor.com 33


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Morningstar Advisor - October/November 2010

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2010

Morningstar Advisor - October/November 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What estate-planning strategies are you and your clients doing before the end of the year?
Next Steps for ETFs
Investment Briefs
Taking It Personal
A Model Practice
Find the Right Fit
Will REITs Put You in the Penthouse?
Prepare for the Worst
Tips for Common Family Situations
Might Makes Right
Built to Last
Four Picks for the Present
Tactical Strategies Miss Their Mark
Time to Hop on the Commodities Bandwagon?
Retailers Balance Caution and Catalysts
In Search of … Recession Survivors
Turmoil-Tested Small-Cap Funds
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VA Sales Rise in Second Quarter
The Third Rail
Morningstar Advisor - October/November 2010 - Intro
Morningstar Advisor - October/November 2010 - Morningstar Advisor - October/November 2010
Morningstar Advisor - October/November 2010 - Cover2
Morningstar Advisor - October/November 2010 - 1
Morningstar Advisor - October/November 2010 - 2
Morningstar Advisor - October/November 2010 - Contents
Morningstar Advisor - October/November 2010 - 4
Morningstar Advisor - October/November 2010 - 5
Morningstar Advisor - October/November 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - October/November 2010 - 7
Morningstar Advisor - October/November 2010 - Contributors
Morningstar Advisor - October/November 2010 - Letter From the Editor
Morningstar Advisor - October/November 2010 - What estate-planning strategies are you and your clients doing before the end of the year?
Morningstar Advisor - October/November 2010 - 11
Morningstar Advisor - October/November 2010 - Next Steps for ETFs
Morningstar Advisor - October/November 2010 - 13
Morningstar Advisor - October/November 2010 - Investment Briefs
Morningstar Advisor - October/November 2010 - 15
Morningstar Advisor - October/November 2010 - 16
Morningstar Advisor - October/November 2010 - 17
Morningstar Advisor - October/November 2010 - Taking It Personal
Morningstar Advisor - October/November 2010 - 19
Morningstar Advisor - October/November 2010 - A Model Practice
Morningstar Advisor - October/November 2010 - 21
Morningstar Advisor - October/November 2010 - Find the Right Fit
Morningstar Advisor - October/November 2010 - 23
Morningstar Advisor - October/November 2010 - 24
Morningstar Advisor - October/November 2010 - 25
Morningstar Advisor - October/November 2010 - Will REITs Put You in the Penthouse?
Morningstar Advisor - October/November 2010 - 27
Morningstar Advisor - October/November 2010 - 28
Morningstar Advisor - October/November 2010 - 29
Morningstar Advisor - October/November 2010 - 30
Morningstar Advisor - October/November 2010 - 31
Morningstar Advisor - October/November 2010 - Prepare for the Worst
Morningstar Advisor - October/November 2010 - 33
Morningstar Advisor - October/November 2010 - 34
Morningstar Advisor - October/November 2010 - 35
Morningstar Advisor - October/November 2010 - Tips for Common Family Situations
Morningstar Advisor - October/November 2010 - 37
Morningstar Advisor - October/November 2010 - Might Makes Right
Morningstar Advisor - October/November 2010 - 39
Morningstar Advisor - October/November 2010 - 40
Morningstar Advisor - October/November 2010 - 41
Morningstar Advisor - October/November 2010 - 42
Morningstar Advisor - October/November 2010 - 43
Morningstar Advisor - October/November 2010 - 44
Morningstar Advisor - October/November 2010 - 45
Morningstar Advisor - October/November 2010 - Built to Last
Morningstar Advisor - October/November 2010 - 47
Morningstar Advisor - October/November 2010 - 48
Morningstar Advisor - October/November 2010 - 49
Morningstar Advisor - October/November 2010 - Four Picks for the Present
Morningstar Advisor - October/November 2010 - 51
Morningstar Advisor - October/November 2010 - Tactical Strategies Miss Their Mark
Morningstar Advisor - October/November 2010 - 53
Morningstar Advisor - October/November 2010 - 54
Morningstar Advisor - October/November 2010 - 55
Morningstar Advisor - October/November 2010 - 56
Morningstar Advisor - October/November 2010 - 57
Morningstar Advisor - October/November 2010 - Time to Hop on the Commodities Bandwagon?
Morningstar Advisor - October/November 2010 - 59
Morningstar Advisor - October/November 2010 - 60
Morningstar Advisor - October/November 2010 - Retailers Balance Caution and Catalysts
Morningstar Advisor - October/November 2010 - 62
Morningstar Advisor - October/November 2010 - 63
Morningstar Advisor - October/November 2010 - 64
Morningstar Advisor - October/November 2010 - 65
Morningstar Advisor - October/November 2010 - In Search of … Recession Survivors
Morningstar Advisor - October/November 2010 - 67
Morningstar Advisor - October/November 2010 - Turmoil-Tested Small-Cap Funds
Morningstar Advisor - October/November 2010 - 69
Morningstar Advisor - October/November 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - October/November 2010 - 71
Morningstar Advisor - October/November 2010 - 72
Morningstar Advisor - October/November 2010 - 73
Morningstar Advisor - October/November 2010 - 50 Most Popular ETFs
Morningstar Advisor - October/November 2010 - 75
Morningstar Advisor - October/November 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - October/November 2010 - 77
Morningstar Advisor - October/November 2010 - VA Sales Rise in Second Quarter
Morningstar Advisor - October/November 2010 - 79
Morningstar Advisor - October/November 2010 - The Third Rail
Morningstar Advisor - October/November 2010 - Cover3
Morningstar Advisor - October/November 2010 - Cover4
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