2010 Gift, Estate and Generation-Skipping Transfer Tax Laws
2010 Estate Tax Planning Strategies—Once-in-a-Lifetime Opportunities vs. Potential Traps for the Unwary
September 21, 2010
As of the date of this Advisory, Congress has yet to make any changes to the 2010 gift, estate or generation-skipping transfer (GST) tax laws. While it is possible that future legislation may retroactively eliminate certain benefits of gifting in 2010, there are still planning opportunities now that have never before been available and may never return.
For 2010, the gift tax exemption is $1,000,000 and the gift tax rate is 35%—the lowest rate since the 1930s. (In 2009 the maximum gift tax rate was 45% and the rate is scheduled to increase to 55% in 2011.) There have been various legislative proposals to change the law in 2011 and future years that would set the maximum gift tax rate at anywhere between 35% and 55% or higher. Accordingly, in certain situations it may be advantageous to consider making large taxable gifts in 2010 and paying a 35% gift tax because it is unlikely that any future rates will be lower.
Lifetime Gifts to Grandchildren
For 2010, there is also no GST tax; therefore, grandparents can make unlimited outright gifts to grandchildren (or to lower generations) without the imposition of any GST tax (although such gifts would be subject to the gift tax as described above). In 2009 the maximum amount that a grandparent could give to grandchildren without incurring a GST tax was $3,500,000, and any excess amounts would have been subject to a gift tax of 45% plus a GST tax of 45%. In 2011, the maximum combined amount that a grandparent can give to grandchildren is scheduled to decrease to approximately $1,350,000, and the maximum GST tax rate is scheduled to increase to 55%. (There have been various legislative proposals to change the law in 2011 and future years that would set the maximum amount that a grandparent could give to grandchildren during lifetime and at death at anywhere between $3,500,000 and $10,0000,000, and set the maximum GST tax rate at anywhere between 35% and 55% or higher).
Accordingly, in certain situations it may be advantageous for grandparents to consider making large taxable gifts to their grandchildren (or to lower generations) in 2010 and paying only a 35% gift tax, because in the future similar gifts may be subject to both a gift tax and the GST tax.
Distributions to Grandchildren from GST Non-Exempt Trusts
For 2010, distributions from irrevocable trusts that are not exempt from GST (GST Non-Exempt Trusts) to a grandchild of the creator of the trust will not be subject to a GST tax. However, in 2011 and in future years, similar distributions from a GST Non-Exempt Trust to a grandchild will be subject to a GST tax.
Accordingly, in certain situations it may be advantageous to consider distributing assets from a GST Non-Exempt Trust this year to the grandchildren of the creator of the trust because such assets may in the future be subject to a GST tax upon the death of the parents of such grandchildren.
Risks Associated with 2010 Strategies
As previously stated, it is unclear whether Congress will (or can) implement legislation that retroactively eliminates or reduces the potential benefits described above. In addition, lifetime gifting strategies require the payment of a gift tax (i.e., by April 15, 2011), which tax payment may be postponed until the death of the donor, although it is unknown what the transfer tax rate will be at that time.
Other Legislative Proposals
On the other end of the political spectrum, recent legislative proposals have addressed perceived estate and gift tax abuses by calling for limits on valuation discounts and the requirement of a minimum term (e.g., 10 years) for grantor retained annuity trusts (GRATs). Accordingly, clients who are thinking about implementing planning strategies that use these types of techniques should act sooner rather than later.