Untraditional Tax Advice

This opportunity may not last!

Our efforts as attorneys are most often focused on helping our clients avoid taxes, or if our clients cannot avoid them, then deferring them to a later year. But sometimes it is advantageous to pay taxes early. We see this from time to time with capital gain taxes. When those tax rates are expected to be higher in the future, taxpayers may choose intentionally to recognize gain in the current year in order to pay taxes at lower rates.

That's the case today with the gift tax, which for 2010 is 35 percent. It was 45 percent last year, and will be 41 percent to 55 percent next year unless Congress changes the tax laws before then. So if your estate is sizeable and you expect that eventually your family will have to pay gift or estate tax when you transfer your property to a younger generation, then it might be most efficient to make taxable gifts this year to take advantage of the relatively low 35 percent gift tax rate.

Perhaps more importantly, at present there is no generation-skipping transfer (GST) tax in effect for 2010, so it is a particularly good time to make gifts to your grandchildren, or to the children of your nieces and nephews, or to others who are more than one generation younger than you.

To put this in perspective, consider that in 2011 taxpayers will be allowed to give just $1 million of property to their grandchildren without paying the GST tax. For gifts made that exceed $1 million, both federal gift tax and the GST tax would be payable (absent a change in the tax law before then). Assuming a 55 percent gift tax rate, next year it would cost $1,402,500 in gift and GST tax to give an additional $1 million to a grandchild. This year the cost would be about $350,000. Rarely do clients find opportunities to reduce taxes by three-fourths. The gifts do not have to be large to make a positive impact.

Late last year and early this year some members of Congress announced they wanted to pass a new estate, gift, and GST tax law in early 2010 and make it retroactive to the beginning of the year. There were several efforts to do that, but none have seemed to gain much traction. And as the year passes, and with elections looming, it becomes less and less likely that any new tax legislation would be retroactive to Jan. 1, 2010. Nevertheless, a risk exists that Congress might pass new laws before the end of the year and somehow trip-up taxpayers' efforts to capitalize on the current 35 percent gift tax rate and the temporary absence of a GST tax.

One way to hedge against that risk is to make gifts close to the end of this year, when we expect to have a better sense of whether today's tax laws will be changed retroactively, and whether the 2011 laws might somehow be even more favorable. If you conclude, as we now suspect, that these transfer taxes won't be cheaper than they are today, then you could make gifts at the end of 2010. But if you adopt this wait-and-see approach, be sure to prepare now. It often takes time to effectuate a significant gift, especially if the property you are giving is hard to value, like an interest in a family business. You should have the valuations complete and the legal papers ready so that you can act as soon as the year draws to a close or the tax laws become more certain.

If you have any questions, please contact Kevin Alerding, Kristine Bouaichi, Gina Giacone, Richard Johnson, Andrew Vento or Gordon Wishard.

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.