The widely publicized tax law President Obama signed on Dec. 17 provides an unusual opportunity for tax benefits from a specialized type of gift made before the end of 2010. The new law, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Act), reinstates the estate tax with an increased exemption and lower rate for two years, through 2012. This and the other changes made by the Act present a number of estate planning opportunities and challenges. McGuireWoods’ Private Wealth Services Group is preparing a white paper on these opportunities and challenges, which will be distributed in early January.
Meanwhile, the Act has kept what is popularly viewed as the lifetime gift tax exemption (technically achieved through application of a “unified credit”) at a level of $1 million for 2010, has clarified the application of the technical rules applicable to the generation-skipping transfer (GST) tax, but has kept the GST tax rate at zero for 2010. These developments present an opportunity to obtain a one-time partial exemption from GST tax for certain gifts made before the end of 2010.
The Gift Technique
The gift must be made to grandchildren of the donor, or to persons in the same generation as grandchildren (such as grandnephews and grandnieces) or a younger generation, or to a trust or trusts benefiting such persons. If the gift is made in trust, the donor’s children (or others in a generation older than the primary beneficiaries) may not be beneficiaries of the trust. To the extent that the gift, combined with the donor’s taxable gifts in past years, exceeds the $1 million gift tax exemption, it will be subject to gift tax at a rate of 35%.
Tax Benefits of the Gift
The gift itself, and distributions from the trust to the intended primary beneficiaries, are exempt from GST tax if the gift is made in 2010. It is not necessary to allocate “GST exemption” to the gift to achieve this exemption. Thus, the donor’s GST exemption, increased by the Act to $5 million, will remain available for other transfers, including transfers in 2011 when the gift tax exemption also increases to $5 million.
Example: Grandparent makes a 2010 gift in trust providing that Grandchild is the primary beneficiary during Grandchild’s life. The initial gift is subject to gift tax but not GST tax. Distributions to Grandchild for any reason are exempt from GST tax. Some distributions for the benefit of Grandchild’s children, such as for medical care or education, may also be exempt from GST tax. Thus, the gift “skips” at least one generation, without generating a GST tax or using GST exemption as it would in other years.
Who Should Consider Such Gifts
This technique is not suitable for everyone. In general, the person who can benefit from making such gifts is someone who fits the following description.
- Substantial wealth readily available for making a gift.
- Willingness to make such a gift this year and to pay a gift tax in April 2011.
- Intention to provide long-term estate planning benefits to younger-generation individuals – for example, not just to children or charity.
- Likelihood of using the increased $5 million GST exemption for other transfers, probably for 2011 gifts but in any event for other transfers during life or at death.
- Other adequate provisions for children or other older-generation family members, who will be skipped by such a gift.
- Willingness and availability to give attention to important planning considerations before the end of the year, including the creation of a new trust or trusts (because a gift to an existing trust will work for this purpose only in rare circumstances).
Immediate Action Required
Readers for whom such a gift may be suitable should promptly contact a member of McGuireWoods’ Private Wealth Services Group for an evaluation of whether such a gift would indeed be advantageous and for advice about the steps needed to complete the gift before the end of 2010.
McGuireWoods Private Wealth Services
Our Private Wealth Services Team stands ready to help clients and their advisors obtain estate planning results that benefit themselves and their families from tax and non-tax perspectives. The team is ranked by Chambers and Partners, the international rating service for lawyers, as one of two top-band private wealth services practice groups in the country. Our professionals throughout the United States and in London are dedicated to estate planning and the analysis of related tax and fiduciary issues. Click here for a full listing of our lawyers and their locations.