If the generation-skipping transfer tax (“GST tax”) provisions of the proposed Tax Bill from December 9 remain unchanged, the most significant year-end tax planning opportunity is the ability to make gifts to trusts for grandchildren and great-grandchildren without imposition of the GST tax and without utilizing any of your GST tax exemption. The Tax Bill provides both a complete exemption for generation-skipping transfers in 2010, and a $5,000,000 GST tax exemption (less GST tax exemption allocated to prior transfers) to apply to gifts during 2010-2012, to existing trusts or to new trusts. You would utilize the $5,000,000 GST tax exemption for gifts to a trust in which children are beneficiaries or to a trust you expect to remain in existence for several generations (because the entire trust can be insulated from transfer taxes for multiple generations). You could elect to retain your full GST tax exemption when you make a gift in 2010 to a trust that is only for grandchildren or only for great-grandchildren. However, when a distribution is made from such a trust to a younger generation (for example, a distribution to a great-grandchild from a trust established for grandchildren and their descendants), the GST tax will apply. Thus, clients with both grandchildren and great-grandchildren might wish to make separate gifts to trusts at each generation level, with the expectation that the funds in each trust will all be used for that generation.
Although the GST tax exemption for 2010 has been proposed to increase to $5,000,000, the gift tax exemption in 2010 is limited to $1,000,000. Thus, establishing large trusts for grandchildren or great-grandchildren in order to minimize the impact of the GST tax will still result in application of gift tax at 35%. For example, a transfer of $5,000,000 to a trust that is established for grandchildren and their descendants during 2010 would result in a gift tax of $1,400,000 for someone who has not utilized any of his or her gift tax exemption. Alternatively, a gift of $5,000,000 could be made to a trust for children, grandchildren, and future descendants with the same gift tax cost during 2010, and without any GST tax by applying the individual’s $5,000,000 GST tax exemption (again, assuming that none of that individual’s GST tax exemption has been allocated to prior transfers).
In addition to gifts, certain distributions also may be made without GST tax implications. Specifically, distributions can be made from existing trusts that are not exempt from the GST tax to grandchildren or great-grandchildren during 2010 without application of the GST tax, and it appears that these amounts can be held in trust or a custodial account.
Remember, this Tax Bill is in the sausage factory and a lot of changes can (and probably will) occur before a final bill is actually signed. We expect that the $5,000,000 exemption amounts and the 35% tax rate to be challenged, and it is possible that the final Tax Bill will include 2009 exemptions and rates. However, there is a short window before the end of the year, and you should consider whether it makes sense to take advantage of the GST tax planning opportunities available.