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"2010 Tax Act" Year-End Transfer Tax Planning Alert
 Surprising many, Congress and President Obama were able to agree upon a far-reaching compromise before the Christmas holiday that affects unemployment benefits, estate planning and taxes, among other things. The outcome is entitled "The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312" ("2010 Tax Act") and has been signed into law. The new law contains numerous significant changes that will affect estate plans across the board. The following items require immediate attention, and possibly action, as they may affect your planning for the year 2010.
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.
 The $5 million gift exclusion does not begin until 2011. This might be confusing to many taxpayers because the $5 million exclusion for estate and Generation Skipping Transfer ("GST") is effective January 1, 2010.
2010 Gifts to Grandchildren
- You may be able to make unlimited gifts to grandchildren, to a 529 Plan or UGMA account for a grandchild or 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") 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%.
- 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 must calculate and consider the cost before proceeding.
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 credit shelter 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.
- 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.
- 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.
- 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 considerable practical constraints on these planning options that cannot be ignored. 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 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 us at info@law-morris.com or (561) 750-3850. |
