MAKING GIFTS IN 2010 IN ADVANCE OF PROBABLE GIFT TAX RATE INCREASE AND REINSTATEMENT OF GST TAX
While lifetime gifts in any year generally are more tax efficient than bequests at death, this year’s historically low Federal gift tax rate and lapse in Federal generation-skipping transfer (“GST”) tax provide an especially appealing opportunity for efficient wealth transfer.
Lifetime gifts in excess of $1,000,000 are subject to Federal gift tax. In 2010, the top gift tax rate is 35%. By comparison, the top 2009 gift tax rate was 45% and the top 2011 gift tax rate (if no superseding legislation is enacted) will be 55%; indeed, the 35% rate is the lowest Federal gift tax rate since 1934. Loan forgiveness or direct gifts to grandchildren in 2010 are particularly tax efficient because not only does the donor take advantage of the historically low gift tax rate, but such planning also avoids the GST tax that a transfer to grandchildren in any other year would incur.
While the risk remains that new legislation will retroactively increase the 2010 gift tax rate and/or retroactively reinstate the GST tax, this possibility becomes more remote as the year draws to a close (and there are ways to structure gifts so as to attempt to limit the effect of any retroactive legislation).