2010 Year-End Gifting Opportunities

A lot of people know that the estate tax has been repealed for 2010 only, however relatively few people know that the Generation Skipping Tax ("GST") has been repealed for 2010 as well.  The GST is designed to prevent individuals from 'skipping' a generation of estate taxes by transferring assets to their grandchildren in lieu of leaving the assets to their children.  The way it works is to impose a tax upon transfers to relatives more than one generation younger than the donor, in addition to any applicable gift and estate taxes.

Individuals who make generation skipping gifts in 2010 rather than waiting until the GST tax comes back into effect in 2011 can realize substantial transfer-tax savings.  Assume an individual wants to make a $1 million gift to his grandchildren and all of his or her GST exemption has already been used.  The gift tax rate in 2010 is 35% and there is no GST tax, however in 2011 the gift tax rate is scheduled to rise to 55% and the GST tax is scheduled to come back into effect at a rate of 55%.  Consequently, if the individual makes the $1 million gift in 2010, he or she will pay $350,000 in gift tax and no GST tax.  If said individual makes the $1 million gift in 2011, however, he or she will pay $550,000 in gift tax, $550,000 in GST tax, and an additional $302,500 as gift tax on the GST tax.  In the final analysis, our individual saves $1,052,500 in taxes if he or she makes the gift this year instead of waiting until 2011.

There are some potential drawbacks, however, to making generation-skipping gifts in 2010.  A donor could make a gift to his grandchildren now, incur a gift tax liability, and then die during 2010.  To guard against this, however, the donor could simply transfer the assets to a revocable trust which will become irrevocable on December 31st, 2010, when it is clear that the donor will survive the year's end.  There is also the threat that Congress may pass a law applying the GST tax retroactively to transfers made during 2010.  In my opinion, however, the chances Congress will promulgate a retroactive GST tax are very slim and are steadily decreasing the closer we get to the year's end.

Obviously, this type of gifting strategy is only appropriate for certain taxpayers.  It can only benefit taxpayers with substantial assets who have the potential for incurring considerable estate tax liability.  Consequently, I would only recommend this strategy for clients who need to implement a gifting plan, or who already have a gifting plan in place.

If you feel that you or one of your family members could benefit from making year-end generation skipping gifts, feel free to contact me with any questions.   As always, I encourage readers to post their comments and questions.  Also, readers can call me at my office at no cost to discuss their questions about the GST, and other estate planning and elder law matters.

The content provided is designed to stimulate discussion and does not constitute legal advice.