In addition to the repeal of the federal estate tax for one year during 2010, there is another break that should be considered by very wealthy families — the reduction of the federal gift tax for one year.
Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the maximum federal gift tax rate for 2010 is 35%. If Congress does nothing, the maximum rate will return with a vengence to 55% in 2011, plus an additional 5% surtax for taxable transfers over $10 million until the benefits of lower brackets are phased out.
The gift tax applies for cumulative taxable gifts exceeding a $1 million lifetime exemption. Annual gifts of present interests by a donor to a donee up to $13,000 per year (for 2010) are also exempt from gift tax.
Also remember the federal generation-skipping tax is repealed for one year for 2010, creating the possibility of making significant gifts to grandchildren or generation-skipping trusts.
When the reduced gift tax is combined with leveraging strategies like making gifts of minority interests in family limited partnerships, long-term savings to the family can be significant.
Remember gifts of property aren’t eligible for fair market value basis adjustments that apply to inherited property, which will be reinstated after 2010.
It seems to me it’s highly likely the estate tax exclusion of $3.5 million will be restored after 2010, so making cumulative taxable gifts of more than $1 million to $3.5 million means losing the benefit of some of that exclusion. (Cumulative taxable gifts are added to the assets of the decedent less liabilities and other deductions when computing the federal estate tax.)
The wild card is whether Congress is going to attempt to reinstate these taxes retroactively for 2010. Proposals are all over the map, including doing nothing and giving taxpayers the choice of being taxed under reinstatement or under the rules enacted in 2001.
There are many considerations when making a significant gift, including eliminating your beneficiaries’ motivation to work. Some states also impose gift taxes.
You should consult with your estate planning advisors when planning any significant gift, and recognize there is a risk of exposure to retroactive imposition of a tax if you go ahead with a gift.
If we can be of service in helping you evaluate this decision, call Dawn Siemer for an appointment Mondays, Wednesdays or Fridays at 408-918-3162.
IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.