Generation Skipping Transfer Tax Year-End Planning

Often overlooked during this “year-to-die” without an estate tax, the generation skipping transfer (“GST”) tax lapsed on January 1, 2010. Similar to the estate tax, the GST tax lapse affords some great year-end tax planning opportunities. These opportunities will not last long as the federal estate and GST tax regimes return on January 1, 2011.
Outright Gifts
Different from the estate and GST taxes, the gift tax remains in effect in 2010. The $1 million gift tax exemption remains with a 35% tax rate. Without congressional action, the gift tax rate will increase to 55% on January 1, 2011. Individuals may seek to take advantage of the historically-low gift tax rate by making outright gifts to beneficiaries. This simple, straightforward tactic may be advantageous for those looking to take advantage of the lowest gift tax rate seen in 70 years.
Gifts to Grandchildren
Another worthwhile consideration is giving assets to grandchildren. This year, grandparents can gift unlimited amounts of assets to grandchildren free from the GST tax. As noted above, the grandparents would still pay gift tax on amounts in excess of the lifetime exemption. If the assets are given outright, instead of held in trust, the assets will be held tax-free until the grandchild’s death. As this year has proven, we cannot anticipate where the GST tax rate will be in future years. As a result, individuals should make outright gifts to grandchildren and pay any gift tax at the lower 35% tax rate on any such gifts, and thereby avoid any future GST tax on such assets. If grandchildren are too young or irresponsible to handle large amounts of money, gifts of interests in a limited liability company managed by a responsible family member could be a substitute for monetary gifts.
Distributions from Trusts
With the lapse of the GST, individuals holding assets in non-exempt GST trusts should consider making distributions to the trust creator’s grandchildren. These distributions will be subject to GST tax in 2011 and later years. The non-exempt GST trust distributions are not subject to the gift tax and will avoid GST tax in 2010. In addition, by distributing the assets this year the assets will not be subject to the GST tax upon the death of the grandchild’s parent.
Caution
Although it is unlikely, Congress may enact a retroactive estate and/or GST tax for 2010. In light of the heated debates over the extension or modification of the Bush income tax cuts, there exists a very remote chance that Congress would take such action. Because of the continued uncertainty, individuals should take precaution to properly structure and document any gifts or distributions made before year-end.