“Making Taxable Gifts in 2010 ” by Thomas D. Peebles, Jr.
As calendar year 2010 draws to a close, we again recommend that our high net worth clients consider making taxable gifts to children and grandchildren. Making gifts beyond the gift tax exemption and paying gift tax is often the lowest cost technique for transferring wealth to succeeding generations. This is particularly true for taxable gifts made in calendar year 2010.
Clients and their advisors are generally reluctant to trigger a taxable gift. After all, no one likes to pay taxes that they could postpone. But in calendar year 2010 – and only in 2010 – the federal gift tax rate has been reduced to 35%. Unless Congress acts before the end of the year, the scheduled sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) will occur. As a result, beginning on January 1, 2011, taxable gifts will again be subject to a tax rate of as high as 55%. If clients are willing and able to do so, making a taxable gift to children in 2010 will remove the value of the gifted assets from their estates at a 35% tax rate and avoid a 55% tax rate when those assets pass to the children at the client’s death (a 20% tax savings).
Taxable gifts to grandchildren in 2010 offer additional advantages. Generally, gifts to grandchildren are subject not only to a gift tax, but also to an additional layer of tax called the generation skipping transfer tax (GST tax). For transfers occurring in 2010, however, the GST tax has been repealed. If EGTRRA sunsets as scheduled, the GST tax will be reinstated on January 1, 2011, at a tax rate of 55% and a relatively low exemption amount ($1,060,000). The result is that gifts to grandchildren above the exemption amounts in 2010 will be taxed at a rate of “only” 35%, but gifts to grandchildren above the exemption amount in 2011 will be subject both to a 55%gift tax and a 55% GST tax.
At this writing, there is no clear indication of what Congress will do with federal estate, gift and GST taxes. If Congress extends the current tax provisions, there is no urgency in making gifts. If, however, Congress does not act and allows EGTRRA to sunset as scheduled, then now is the time to consummate taxable gifts to children and grandchildren.
Time is short. If you would like to discuss completing gifts to children and grandchildren in 2010, please contact any member of our Estate Planning Practice Group team.