As a result of Congress' failure to address the federal estate and generation–skipping transfer tax prior to January 1, 2010, inidividuals have a unique opportunity for the remainder of this year to transfer wealth at a significantly reduced transfer tax cost. Assuming that there is no attempt by Congress to retroactively change the gift tax regime for the current year, the federal gift tax rate for taxable gifts made in 2010 is thirty-five (35%) percent. This represents a significant reduction from the forty-five (45%) percent rate that was in effect for the 2009 calendar year and from the fiftyfive (55%) percent rate that applied historically and that is slated to again apply after December 31, 2010 in the absence of further legislation.
Individuals have, however, been hesitant to make gifts in excess of their $1,000,000 lifetime gift tax exemption and thus incur a gift tax, in part due to uncertainty in recent years regarding the future of the estate tax. In light of (i) the relatively low gift tax rate currently in effect for the remainder of the year, (ii) the fact that due to the economic slowdown, many asset values are at historic lows, and (iii) the strong likelihood that the estate tax will be reinstated as of January 1, 2011 at a rate in excess of the current gift tax rate, making taxable gifts should, at the very least, be considered by high net worth individuals.
In addition, given that the federal generation-skipping transfer tax has also been repealed for the current year, it is also possible to make taxable gifts to grandchildren and more remote descendants (particularly in situations where children have significant wealth of their own) without incurring an additional generation-skipping transfer tax.
As an example of the potential savings of a gift to a grandchild in 2010 vs. 2011, let’s assume a grandparent makes a $3 million gift to a grandchild after having used up his $1 million lifetime gift tax exemption. In 2011, assuming a 55% rate for each of the gift tax and the generationskipping tax, the tax would be over $4.2 million compared to a relatively cheap $1.05 million today. Furthermore, neither New York nor New Jersey imposes a gift tax, thus making lifetime gifts even more attractive for residents of those states.
Another alternative, which would serve to further reduce the amount of the gift tax is a socalled “net gift”. A net gift occurs when the donor and donee agree that the donee (rather than the donor) will pay any gift tax resulting from the transfer of property. The net gift is computed by reducing the gross value of the gift by the amount of gift tax the donee will have to pay. A determination of the amount of tax owed by the donee requires the use of an algebraic computation. As an example, if a donor made a net gift in 2010 of $1 million to his daughter, obligating his daughter to pay the gift tax, the gift tax would be $259,259 and thus the net gift would be $740,741 (as opposed to the donor gifting his daughter the $1 million and having to pay $350,000 gift tax).
As a result of the unique gifting opportunities that will likely exist for the remainder of 2010, we encourage our clients to consider whether such planning makes sense in light of their particular circumstances. Although the possibility of Congress retroactively reinstating the generation-skipping transfer tax effective January 1, 2010 exists, the odds of this happening seem less and less likely with each passing day.