A Unique Opportunity

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The new tax law (2010 Tax Relief Act) creates an once-in-a-lifetime planning opportunity that ends at midnight, December 31, 2010.

 

Generally, transfers (greater than $13,000 per year) to generations younger than children are subject to what is known as the generation-skipping transfer tax (GSTT), an onerous tax equal to the maximum gift or estate tax rate.  The purpose of this tax, enacted in the late 1980s, is to prevent wealthy individuals from transferring assets to younger generations for the purpose of avoiding application of the estate tax at every generation.

 

The 2010 Tax Relief Act creates a unique opportunity to make gifts through December 31, 2010 that are not subject to the generation-skipping transfer tax.  This is because, under the new law, the tax rate is zero for any generation skipping transfer made in 2010. Beginning January 1, 2011, the tax rate for these transfers with be 35%.  In two short years the rate goes back to 55%.

 

There are three common scenarios offering planning opportunities.  First, make gifts before December 31, 2010 to Skip Trusts.  These are trusts that you create for grandchildren, great grandchildren or more remote generations.  There will be no generation skipping transfer tax.  The gift tax is 35%, after use of the $1 million lifetime gift exclusion.  This strategy is most effective for large taxable estates.  On the gift tax return, you will want to elect out of automatic Generation Skipping Transfer (GST) allocation rules.  For 2010, you will allocate nothing to the GST Exemption because there is no estate tax.  Use a Trust Protector with the power to add beneficiaries (e.g. children/spouse).

 

The second planning scenario deals with the unique planning opportunities for those who are beneficiaries of trusts that will be subject to GSTT upon distribution from the trust.  Distributions should be made from these trusts before December 31, 2010 because the tax rate is 0%.  After this year, the distribution will be subject to at least a 35% tax rate.  Sometimes, there is concern about beneficiaries getting outright distributions.  Some of these concerns may be alleviated if the trustee invests trust assets in limited partnerships or limited liability companies (LLCs) and then distributes the partnership interests or LLC membership interests.

 

The third planning opportunity deals with clearing any loans made to trusts.  The most common scenario involves Irrevocable Life Insurance Trusts.  Until the passage of the 2010 Tax Relief Act, there was no way to allocate the GSTT exemption, so loans were used.  With the new act, you can now allocate the GSTT exemption on a timely-filed gift tax return.  If you unwind the loans now, you can save the 2010 annual exclusion that would otherwise be lost.

 

I strongly encourage you to take advantage of this rare gift from Congress and consider making transfers to generations younger than children, even if you do not yet have grandchildren.  We can help you structure these gifts so that they meet your goals and objectives, regardless of amount.

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