Tag Archives: Tax

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.
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.

Magic Johnson Playing Tax Rates?

Earlier this week, Earvin “Magic” Johnson, a former Los Angeles Lakers point guard, sold his 5% interest in the Lakers franchise. In addition, the Hall of Famer sold his 105 Starbucks franchises back to the company. Many speculate Magic made these sales in order to purchase an NFL team and bring the team to the Los Angeles area. However, overlooked by all of the media coverage is the savvy tax planning underlying Magic’s moves. The capital gains tax rate is set to increase in 2011 to 20%. With the 2010 calendar year-end quickly approaching, Magic made the deft tax move to cash out his interests at the lower 15% capital gains rate. Some may scoff at the difference between a 15% and 20% tax rate. However, Magic reportedly purchased his 4.5% interest in the Lakers in June 1994 for $10 million. The Lakers franchise has an estimated value of $600 million. Therefore, Magic’s interest in the team is valued at approximately $27 million. Magic sold his shares to billionaire season ticket holder Patrick Soon-Shiong. Assuming Magic sold his interest for the full $27 million, by selling his Lakers interest in 2010, Magic saved himself a tidy $850,000 in taxes. Of course, Magic saved even more by selling his Starbucks franchises this year too. Those tax savings alone will go a long ways towards Magic’s recent purchase of a luxury suite at the Lakers’ home arena, the Staples Center.

Nevada Trust Income Subject to California State Income Tax

A Nevada trust may become subject to California state income tax depending on the residence of the trustee or beneficiaries of the trust.  An individual is a California resident if he or she is in that state for other than a temporary or transitory purpose, or if he or she is domiciled in California but is outside the state for a temporary or transitory purpose. Cal. Code Regs., tit. 18, § 17014, subd. (a).  California regulations provide that the income of a trust is subject to California income tax “if the fiduciary or beneficiary (other than a beneficiary whose interest in such trust is contingent) is a resident, regardless of the residence of the settlor.”  § 17742(a). Therefore, even if the trust creator (settlor) is a Nevada resident, the trust income can be subject to California tax based on the residence of the trustee or beneficiary.

If a Nevada trust has two trustees, one trustee is a Nevada resident and one trustee is a California resident, then one-half of the trust income is subject to California income tax.  Where the taxability of trust income depends on the residence of the fiduciary and there are two or more fiduciaries, the taxable income is apportioned according to the number of fiduciaries resident in California.  § 17743.

For those who may be considering a California financial institution as a trustee, this could subject the trust to California tax.  The California regulations specify that “the residence of a corporate fiduciary of a trust means the place where the corporation transacts the major portion of its administration of the trust.”  If the trust company or financial institution will conduct the majority of its trust administration within California then the trust income will be subject to California tax.

Jason Morris