Unique Opportunity to Save Taxes Available
to Select Few
Zero
Percent Generation Skipping Transfer Tax Rate for 2010
Perhaps the
biggest surprise in the tax bill that President Obama signed into law on Dec.
17, 2010, relates to the generation skipping transfer (GST)
tax.
GST Tax
Historically the GST tax was
imposed at the highest estate tax rate and applied to any transfer of property
(whether during life or at death) to persons who are more than one generation
younger than the transferor, including grandchildren, great-nieces and
great-nephews, and anyone else who is more than 27 ½ years younger than the
donor (in tax parlance, these individuals are called "skip people"). But the GST tax was
temporarily repealed for 2010, along with the federal estate tax.
The GST tax
is resurrected by the new tax law, and is effective
for transfers made in 2011, at a rate of 35 percent (which is equal to the
highest estate tax rate).
Zero Percent GST Rate for 2010
In an
interesting piece of legislative drafting, the GST tax also applies to
generation-skipping transfers made in 2010, but at a rate
of zero percent. Thus, there is
a narrow window during which taxpayers can make gifts to grandchildren and
other skip people, without having to pay any GST tax. If you think you might be able to take
advantage of this opportunity, you need to act quickly. The opportunity ends Dec. 31, 2010.
Who Might Take Advantage of This Opportunity
The
opportunity might sound great, but who, really, might take advantage of
it? First, keep in mind that the gift
tax remained in effect during 2010, even though the estate and GST taxes were
repealed. So in 2010, U.S. citizens can
make up to $1 million of taxable gifts during their lifetime without paying any
gift tax. Individuals who have made
taxable gifts less than $1 million can make gifts to skip people in 2010 without
paying any gift or GST tax. But individuals
who already have used their entire $1 million lifetime gift tax exemption might
have to pay gift tax on such gifts, even though there should be no GST tax.
There
is another category of taxpayers who might benefit from the zero percent GST tax rate that is effective for 2010 - irrevocable
trusts that were established in prior years to benefit skip people and that are
not exempt from the GST tax. These
trusts are not common because estate planners and clients often take measures
to avoid establishing trusts that would be subject to the GST tax. Nevertheless, some GST-taxable trusts do exist
for various good reasons. For
GST-taxable trusts, two opportunities exist.
First, the trustee could make distributions from the trust to skip
people before the end of 2010. In most
cases this would trigger application of the GST tax, though at zero percent - a
GST tax-free distribution. Second, the GST-taxable trust could be
terminated in 2010, if the trust terms allow termination, and the property
distributed to skip people in a GST tax-free termination.
This
opportunity might be appealing if:
·
you have not used all of your $1 million
lifetime gift tax exclusion and want to leave more than $5 million worth of
property to your grandchildren or other skip people;
·
you have used all of your $1 million lifetime gift
tax exclusion, want to leave more than $5 million worth of property to your
grandchildren or other skip people, and don't mind paying some gift tax; or
·
you are the settlor,
the trustee or a beneficiary of an irrevocable trust that may be subject to the
GST tax.
For
instance, if you have never made taxable gifts to your grandchildren in the
past and intend to transfer $5 million or less to your grandchildren, you could
do so by giving them that amount in 2011 or 2012, and there should not be any
gift tax or GST tax on those transfers.
If you
intend to transfer $5 million to your grandchildren and do not want to give
that property away during your lifetime, you could leave that amount to them in
your will or other estate planning documents.
If you die in 2011 or 2012, there should not be any GST tax on that
transfer, assuming you have not made any other generation-skipping
transfers. The transfer to your
grandchildren might be subject to estate tax, depending on the other assets
that are includable in your estate at the time of your death.
On the other hand, if you wish to transfer $8
million to your grandchildren, and have already made taxable gifts of $1
million or more to your grandchildren, then you should consider giving $4
million to your grandchildren (or to trusts for their exclusive benefit) before
the end of 2010. In doing so you would
trigger a gift tax of $1.4 million, but you would not pay any GST tax. In 2011 or 2012 you could give them another
$4 million and there should not be any gift tax or GST tax on that gift.
If an
existing irrevocable trust is subject to the GST tax and the trust terms allow
distributions to grandchildren or other skip people, those distributions could
be made in 2010 and neither the trust nor the grandchildren would pay GST
tax. Also, if the trust can be
terminated in 2010 and the property distributed to grandchildren or other skip
people, there would be no GST tax if the termination and distribution is
completed in 2010.
If
you have questions about this change to the GST tax or its application to your
specific circumstances, please call any of our partners, whose names and
telephone numbers are at the top of this article.
This publication is
intended for general information purposes only and does not and is not intended
to constitute legal advice. The reader must consult with legal counsel to
determine how laws or decisions discussed herein apply to the reader's specific
circumstances.
CIRCULAR 230 DISCLOSURE:
To ensure compliance with recently-enacted U.S. Treasury Department
Regulations, we are now required to advise you that, unless otherwise expressly
indicated, any federal tax advice contained in this communication is not
intended or written by us to be used, and cannot be used, by anyone for the purpose
of avoiding federal tax penalties that may be imposed by the federal government
or for promoting, marketing or recommending to another party any tax-related
matters addressed herein.