On Dec. 17, 2010, the President signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Act) into law. The 2010 Tax Act affects several big chunks of the tax code, including federal income tax, federal estate tax, the generation-skipping transfer tax (GST) and the gift tax. Most of its changes strongly benefit IRA clients, and many have fast-approaching deadlines that create an urgency to act now.

INCOME TAX CHANGES

The new legislation keeps the Bush era tax cuts in force through the end of 2012. Clients who converted traditional IRAs to Roth IRAs in 2010 (the first year when high-income clients could make Roth conversions) are in a group that benefits substantially from the extension of the tax cuts.

Those converting in 2010 had a special choice: They could split all the income from the conversion equally between 2011 and 2012, or they could include all the income in 2010. Now in 2011, clients must finally decide which option to choose. They must make the election by the due date for filing 2010 tax returns (including extensions), and once made, the election will be irrevocable.

Before the tax cuts were extended, it looked like this would be a difficult decision for many clients, particularly those at higher incomes. Pay now (for 2010) at lower rates, or defer the liability to 2012 and 2013 (for 2011 and 2012), but pay at potentially higher rates.

Under the new tax law, the debate is substantially simplified, and deferring the income from a 2010 conversion equally into 2011 and 2012 becomes the best option for most of your clients, all other factors being equal. Why pay tax now when you can pay later at the same rates? Clients who defer paying tax on Roth IRA conversions are essentially receiving an interest-free loan from Uncle Sam on their tax liability at the same time their savings are growing tax-free inside a Roth IRA.

Of course, for a small portion of your clients, including all the income from a 2010 conversion in 2010 will still be the best option. This is true if 2010 income is unusually low or your client has unusually high deductions, credits or exemptions for 2010.

ESTATE-TAX LAW CHANGES

A new $5 million estate-tax exclusion applies to deaths in 2010 as well as in 2011 and 2012, although executors of 2010 estates can choose the alternate rules that were in effect last year. For 2010, there was no federal estate tax, but there was also a limited step-up in basis. That left heirs facing the possibility of owing capital gains tax on the sale of appreciated assets. The new rules for deaths in 2010, 2011 and 2012 reinstate the step-up in basis, so no capital gains tax will be owed on capital assets that appreciated during the decedent's lifetime.

For those ultra-wealthy individuals who died in 2010, the most favorable option will most likely be no estate tax, but with virtually no step-up in basis. Those with estates of less than $10 million will likely want to opt for the new rules with a step-up in basis.

The other major change to the estate-tax law is that the applicable exclusion amount is now portable between married couples. Any excluson amount not used by the first spouse to die can be used by the estate of the surviving spouse.

For example, assume John dies in 2011. He leaves $1 million to his children and everything else to his wife, Mary. John made no taxable lifetime gifts. Therefore, John has $4 million of unused estate-tax exclusion, which passes to Mary. If Mary dies in 2012, her estate can exclude up to $9 million from federal estate tax using her own $5 million exclusion, plus the $4 million that John did not use.

Consequently, married couples now have up to $10 million of estate-tax exclusion. For most couples, it makes no difference which spouse dies first or how the assets are distributed after the first death. What does this mean for IRAs and other retirement assets? For many clients, especially married couples, federal estate tax no longer will be an issue, which means their planning strategies could change.

When planning for federal estate tax, most married couples can now name each other as sole IRA beneficiary. With $10 million of estate-tax exclusion available, there is a much lower probability that the estate of the second spouse to die will owe federal estate tax, even if he or she inherits an IRA from a spouse.

Some clients might want to update their beneficiary forms and name a spouse as sole beneficiary of their IRA instead of designating a credit shelter trust as IRA beneficiary. This could allow future beneficiaries to stretch required minimum distributions (RMDs) over a longer life expectancy, minimizing the impact of taxes and allowing the account to grow tax deferred over a longer period of time.