2010, A Great Year To Be Generous: Avoiding the Gift Tax Increase

It is commonly said that there are only two things certain in life: death and taxes. 2011 seems to be the exception. We are close to the end of 2010 and we still don’t know how dividends and capital gains will be taxed or what the estate tax rate will be in 2011. This makes it difficult for anyone to come up with a precise financial plan for next year. One thing we do know is that the current economy has depreciated investments and real estate. This makes it a great year to gift assets at a greatly reduced tax cost.

A gratuitous transfer of ownership of a property will generate a gift tax. However, there are two exemptions from the gift tax. First, gifts up to $13,000 per person per year (in 2010) are not subject to the tax. In addition, an individual can make gifts up to this amount to as many people as he/she wants to each year. The exemption allows a married couple to combine their individual gift exemptions and gift up to $26,000 per recipient per year without incurring any gift tax liability. There is a lifetime gifting limit of $1,000,000; any gift beyond that amount incurs a gift tax.

Consider 2010 a good year to be generous.Generally, any gifts you make now and all the future appreciation will be out of your estate at your death and not subject to the estate tax. The decline in the stock and real estate markets created discounts for almost all asset classes. Consequently, now is the time to consider gifting assets that are at unusually low values. When the economy rebounds, these assets will begin to increase in value, and that future appreciation will occur outside your estate. The maximum gift tax rate is currently at a historic low of 35%, and under existing law, the rate will be increased to 55%. Congress is expected to enact legislation to reduce the increase, but there is no guarantee that this will happen. That is why you should consider making large gifts to children and grandchildren, even if that may mean paying a gift tax.

Another tax benefit to gifting in 2010 is that there is also currently no generation-skipping transfer (GST) tax, it has been repealed only for this year. The GST tax is a separate tax that applies, in addition to any estate or gift tax, to transfers to grandchildren or future generations. This tax is imposed at the highest estate tax rate and is intended to replace the estate tax that is in effect avoided at the skipped generation. The GST tax is expected to be reinstated next year at a rate of 55%. Therefore, year-end 2010 is a great time to make gifts to grandchildren and descendants of younger generations. The gift can be made outright, in the form of a Limited Liability Company, Limited Partnership or to a Trust.

Given the current economic and tax legislation uncertainty, great care and thorough thought are required to execute financial and estate plans. At the very least a prudent individuals will need to review their current estate plan, and seek advice from their estate planning attorney or tax advisor to ensure that it is consistent with their goals and objectives.