HOW MAKING TAXABLE GIFTS IN 2010 CAN SAVE YOUR FAMILY MILLIONS
|HOW MAKING TAXABLE GIFTS IN 2010 CAN SAVE YOUR FAMILY MILLIONS
(ACTION MUST BE TAKEN BEFORE YEAR END)
|Wealthy individuals should seriously consider making taxable gifts and actually paying gift tax before year end. Yes, you read correctly “paying gift tax”. Why? Because along with the 2010 repeal of the estate tax and generation-skipping transfer (“GST”) tax, the gift tax rate dropped to 35%. Unless Congress acts, the gift tax rate (along with the estate and GST tax rates) is expected to increase in 2011 to 55%1 . However, for the reasons discussed below, the effective gift tax rate for 2010 is only a fraction of the estate tax rate after 2010.
Prepaying gift tax rather than waiting and paying estate tax can make sense for individuals with large estates. How so? The gift tax is computed on a tax-exclusive basis (as a percentage of the value of property transferred), while the estate tax is computed on a tax-inclusive basis (as a percentage of all property in a decedent’s estate, including the amount used to pay estate taxes). In addition, many states (including New York and New Jersey) do not have a gift tax while they maintain an onerous estate tax.
A compelling example: A New York resident wants to transfer $10,000,000 to his children. If the taxpayer gifted $10,000,000 to his children (or to a trust for their benefit which is not subject to GST tax2 ) in 2010, the taxpayer would only incur a federal gift tax of $3,500,000. If the same New York resident waited to transfer $10,000,000 to his children at death, after 2010, the taxpayer would need to die with $22,000,000 in assets ($12,000,000 of which would go to the IRS and New York State in estate taxes). In other words, the taxpayer could either transfer $10,000,000 to his children now at a cost of $3,500,000 or at death at a cost of $12,000,0003. As you can see, the 2010 gift will result in an overall tax savings of approximately 70% (or $8,500,000 under these facts).
This is an unprecedented opportunity – but you must act before the end of 2010 to enjoy this benefit. Please contact us immediately to discuss your options.
1In addition, the estate tax and GST tax are expected to be reinstated with an exemption of only $1 million and $1.3 million, respectively.
2Although there is no GST tax in 2010, any taxable gift for the benefit of a grandchild would need to be made directly to such grandchild or to a custodian account for the grandchild’s benefit. The gift should not be made to a trust as it could be subject to GST tax when distributed.
3The donor must survive the gift by three years for the tax brackets to apply.