Generation-Skipping Transfer Tax Update

Help Grandma Avoid Another Tax Bite

Anyone who wishes to make gifts to grandchildren won’t incur any generation skipping transfer tax (GSTT) if they do so by 12/31/10. This applies to gifts outright or gifts to a trust for that grandchild’s benefit. It also applies to distributions from these trusts by 12/31 that would otherwise be subject to the tax. Now is the time to take advantage of this opportunity. The gift will still be subject to regular gift tax if it exceeds the annual exclusion and the $1M exemption, but the gift tax would be at a 35% rate (good rate).
 
This would be good for people who have large taxable estates (over $3.5M - $5M single; double that joint) now and/or whose estate will continue to grow/compound, or who are concerned that the estate tax law just put in place for only 2 years won’t continue at that level ($5M exemption, can use spouse’s unused exemption, exemption unified for gift & estate tax, so the full $5M is for lifetime gifts or at death). After 2012, the law is set to revert back to the 2001 law with a $1M exemption and a 55% tax rate, unless changed again.
 
For individuals looking to reduce their taxable estates, they will also have a 2-year window for making significant lifetime gifts to anyone because they will be able to gift up to $5M during their lifetime without incurring a gift tax. After 2 years, who knows where the law will be and if that will still be the amount of the exemption that can be used during lifetime? Remember that lifetime gifts are an efficient way to transfer wealth because they also remove future growth from taxable estate.