2010 Year-End Estate Planning Opportunity

An important provision of the federal gift tax law is scheduled to expire at the end of the year. Despite continued uncertainty about what Congress might do next, this expiring provision may offer an opportunity to make gifts and other transfers at low tax rates.

While the federal estate tax is repealed in 2010, the gift tax remains. Each person may give up to $13,000 per person in 2010 with no need to report the gift. The $13,000-per-person annual exclusion includes gifts to each child and grandchild. Some clients add gifts to the spouses of their children and grandchildren as well as to other loved-ones. There is no limit on the number of $13,000 gifts made in any year so long as no one person receives more than $13,000. The $13,000 annual exclusion is based upon the calendar year. Gifts can be made in November 2010, and again in January, 2011.

If any one person receives more than $13,000 in any year, the donor must file a gift tax return reporting the taxable gift. Each taxpayer has a $1,000,000 lifetime exemption which prevents any tax from being paid until the aggregate of lifetime taxable gifts (those over the annual exclusion) exceed $1,000,000. (Unlike the annual exclusion, the $1,000,000 lifetime exemption is per donor, and not per donee). 

If taxable gifts exceed the $1,000,0000 lifetime exemption, gift tax is payable. For gifts made in 2010, the gift tax rate is 35% of the excess gifts. However, the maximum gift tax rate is currently scheduled to increase to 55% on January 1, 2011. Additionally, the estate tax and the generation skipping transfer (GST) tax, which are not in effect for 2010, are scheduled to return on January 1, 2011 at a maximum rate of 55%. Although Congress may choose to extend the low 2010 rates or reduce the maximum 55% rate for 2011 and thereafter, it remains unclear whether or when that may happen.

In view of current low gift tax rates, you may wish to consider making taxable gifts this year to children, grandchildren, or other loved ones, and paying gift tax at this low tax rate. There are many ways to structure these gifts, but due to complexities of the tax law, it is important to evaluate and complete your plans as soon as possible.