Unlimited Charitable Deduction through EOY, Estate Tax Credit Equivalent, and more - Law Firm Drew & Ward, A Legal Professional Association Attorneys Cincinnati, Ohio

Laws that affect personal planning, such as income and estate taxes, probate and trusts are constantly changing in big and small ways. This is the first of a series of occasional e-newsletters alerting you to relevant changes.

This newsletter provides only a brief summary of each topic. To learn more about a topic, click on the topic in which you are interested. Some files are password protected. Please email Mark Jordan if you need a password reminder.

Finally, please send Ruth your suggestions for topics that you would like to see discussed in future newsletters.

What's New

Unlimited Charitable Deduction through 12/31/05

CASH gifts by an INDIVIDUAL to MOST PUBLIC CHARITIES between August 28 and year's end are fully deductible. That is, they are not subject to the 50% of adjusted gross income ("AGI") annual charitable deduction limitation and will not be reduced by the 3% phase-out for itemized deductions when AGI exceeds $146,000 ($72,975 for married taxpayers filing separate returns).

One opportunity presented by this limited time tax break is the ability of those over age 59½ to take a large IRA distribution and give it to public charity as an (almost) total wash.

Two public charity types that do not qualify are a "supporting organization" and a "donor-advised fund," e.g., a fund at the Greater Cincinnati Foundation with which the donor continues to be involved. In addition, gifts to a private foundation and gifts of stock do not qualify.

To learn more about this provision of the Katrina Emergency Tax Relief Act of 2005,click here.

Estate Tax Credit Equivalent goes to $2 million on 1/1/06

Each individual has a credit against federal estate tax. That credit is currently equivalent to $1.5 million of taxable assets. On January 1 the credit will increase to the equivalent of $2 million of taxable assets. Note, however, that the credit available against GIFT tax is NOT increasing but will remain equivalent to taxable gifts of $1 million.

It is very common for married couples with over $1 million in combined assets to have an estate plan that provides for a "B" or "credit shelter" or "family" trust to be established after the first death. This is called an "A/B trust" or "credit shelter trust" or "two-trust" plan. This is still an appropriate plan for married couples with over $2.2 million in combined assets, although the details of the relative funding of the two trusts might need to be updated. Couples with combined assets under $2.2 million should consider simplifying their trust plan.

To learn more about how the increase in the estate tax credit might affect your estate plan, click here.

Ohio Tax Amnesty 1/1/06 - 2/15/06

The Ohio Department of Taxation ("ODT") is offering a one-time-only amnesty program from January 1 to February 15, 2006. The 2006 Ohio Tax Amnesty Program is being offered as the result of the many changes Ohio's tax code has gone through in the recent years. Given those changes and the complexity of the tax code in general many Ohioans may have made inadvertent errors in their past filings.

This amnesty program applies to virtually every type of Ohio tax and permits you to file for the first time for a back year, or amend a back year, WITHOUT PENALTY. In addition, interest charges will be reduced by 50%.

ODT states on its website that the chance of being discovered owing back taxes has gone up substantially due to increased communication between states, and also between states and the IRS. Additionally, ODT states that it now has more resources to increase its effectiveness at finding and recovering delinquent taxes.
To learn more about the 2006 Ohio Tax Amnesty Program, click on tax.ohio.gov/amnesty.

Reminders

Annual Exclusion Gifts

If you, or you and your spouse, expect to have a taxable estate (over $2 million per single person or $4 million per couple with an appropriate trust plan, discussed above), an easy and effective way to reduce your taxable estate is to make regular "annual exclusion" gifts. In 2005, each individual has an exclusion from gift tax of $11,000 per person per year.

On January 1, this exclusion will INCREASE to $12,000 per person per year.

For example, Dick, a widower with a $1 million investment portfolio and a $1.5 million IRA, can give up to $11,000 to each of his three children this year and $12,000 next year without incurring gift tax or even filing a gift tax return. These gifts would reduce his estate-taxable assets by $33,000 and $36,000, respectively (plus any appreciation or income that those assets would have earned before his death), a potential estate tax saving of at least $15,000 and $16,500, respectively. If Dick makes these gifts an annual routine, the estate tax savings can add up dramatically.

To learn more about using the gift tax exclusion to make gifts, including gifts by married couples, gifts to minors, the basis of gifted property, and unlimited gifts for tuition or medical expenses, click here.

Update your Health Advance Directives

Among statutes governing living wills and health care powers of attorney ("advance directives"), Ohio has one of the most complex in the nation. It is therefore important that Ohio residents use the forms developed specifically to comply with the Ohio statute. These form were most recently updated at the end of 2004. Advance directives signed since then MUST be on the NEW form in order to ensure effectiveness. Advance directives signed before then are still valid but should be updated every few years in order to incorporate law changes, family changes and changes in your wishes.

The most significant change in the new forms is addition of detailed organ donation provisions. In addition, the new forms provide for registration of your organ donor status with the Ohio Bureau of Motor Vehicles so that your wishes can be effectuated most efficiently.

To learn more about the Ohio living will, health care power of attorney, and related health care documents, and to view and print the new advance directives forms, click on www.ohpco.org/living_will.htm.

Newsletter - December 1, 2005