Year end Gift and GST Moves to Consider

2010 Tax Act

Year End Transfer Tax Planning Alert

Dear Client, Friend, and Colleague:

The Tax Relief, Unemployment Insurance Reauthorization,
and Job Creation Act of 2010, P.L. 111-312 (“2010 Tax Act”) has been signed
into law. There are a host of significant changes that will affect everyone’s
estate plan. The following are urgent points that may affect your planning for
the 2010 year, and may require immediate action:

• 2010 Gift Exclusion:
  • The gift exclusion remains at only $1 million
    for 2010. If you are married, you and your spouse can together gift
    $2 million.
  • Caution: These figures assume that you have
    never made taxable gifts before (gifts in excess of $13,000 per
    donee/year).
  • Caution: The $5 million gift exclusion only
    begins in 2011. This might be confusing to many taxpayers because
    the $5 million exclusion for estate and Generation Skipping
    Transfer (“GST”) is effective 1/1/10.
• 2010 Annual Gifts:
  • Do you stop making any additional 2010 annual
    gifts ($13,000, tuition and medical) because the $5 million
    exclusion in 2011 will mean that the estate tax will never apply to
    you?
  • Alternatively, should you aggressively plan
    gifts before year end because in 2013 the estate tax law is
    supposed to revert to a $1 million estate exemption and 55%
    rate?
  • Caution: The law, and hence planning, still
    remains uncertain. This creates both risks and opportunities that
    you need to weigh.
• 2010 Gifts to Grandchildren:
  • You may be able to make unlimited gifts to
    grandchildren, or even to trusts for grandchildren (this had been
    without doubt until very recently), and not trigger any GST
    tax.
  • In 2011 and 2012 transfers to grandchildren
    (and other “skip persons” in GST parlance) will be limited to the
    $5 million GST exemption.
  • Unless Congress acts in 2013 the GST
    exemption drops to $1 million (inflation indexed) and the rate
    increases to 55%.
  • Caution: This is a free pass for GST, not for
    gift tax, and if you gift more than $1 million (or what remains of
    your gift exclusion) in 2010 you will pay a gift tax.
  • The 35% gift tax rate is the lowest in estate
    tax history, but is no lower than the maximum gift, estate and GST
    rate of 35% for 2011 and 2012. While that might be an advantageous
    tax move, you need to be aware of the cost before proceeding.
  • If you pass on the opportunity to make gifts
    to grandchildren in 2010, future large gifts could trigger gift (or
    estate) and GST tax so that the marginal tax cost to make large
    gifts to grandchildren after 2010 could be substantially
    greater.
• 2010 Trust Distributions To Grandchildren:
  • Trustees of certain trusts might have a
    similar opportunity as described above for you to make gifts to
    grandchildren.
  • Many trusts were not structured to avoid the
    GST tax on transfers to grandchildren and other “skip persons.” For
    example, a bypass trust formed under a late spouse’s will may have
    listed the surviving spouse and all descendants as beneficiaries,
    but GST exemption may never have been allocated to exempt the
    assets in the trust from being subject to GST tax if distributed to
    grandchildren. Certain types of trusts were never efficient for GST
    planning. Examples include Grantor Retained Annuity Trusts
    (“GRATs”), Charitable Lead Annuity Trusts (“CLATs”) and Qualified
    Personal Residence Trusts (“QPRTs”). Many Irrevocable Life
    Insurance Trusts (“ILITs”) did not have GST exemption allocated to
    protect them from GST tax.
  • Trustees of these trusts might be able to
    make distributions to grandchildren (or other “skip persons”) free of
    any GST tax, if these distributions are made before the end of
    2010.
  • Caution: The mere fact that there would be a
    tax advantage to these distributions is not sufficient. The terms
    of the trust agreement, or will that created the trust, must permit
    these distributions. If the governing document does not permit
    these distributions, it may be possible that state law, or actions
    taken based on state law, could facilitate such tax advantaged
    distributions.
  • Caution: There may also be issues as to which
    beneficiaries are benefited and which are not. However, given the
    potential for significant transfer tax savings perhaps these issues
    can be resolved.

There are significant practical constraints on these
planning options. While potentially very advantageous, even lucrative from a
planning perspective, there is little time to evaluate, plan and implement
these transactions. It is likely already too late to have an institutional
trustee review, process and form a new trust even if the estate planning
attorney can draft it. The 2010 Tax Act is very new. It is only just being
analyzed by professional advisers. The law is potentially subject to
modifications by technical correction acts. Provisions of the law may be
interpreted by the Treasury Department issuing regulations, and the IRS issuing
forms and instructions. If you wish to evaluate and possibly take advantage of
any of these opportunities you should contact all relevant advisers
immediately. This might include the trust officers and trustees of any trusts,
your CPA, estate planning attorney, wealth manager, insurance consultant and
others.