Much ink has been spilled on the subject of our President and Congress’s failure to address the federal estate tax in a coherent way. Last year there was a $3.5 million exemption. This year there is no federal estate tax at all. And it looks like there is a good chance there will be an estate tax with a $1 million exemption in 2011.
It’s bizarre. Billionaire George Steinbrenner died in 2010, and his heirs will pay no estate tax at all. If your neighbor who is worth $1 .5 million dies in 2011, his estate will pay the federal government $210,000 in estate tax. Insane.
But it is what it is. Yet in this mess there is an opportunity.
While there is no estate tax in 2010, there is a gift tax. Its lifetime exemption is $1 million and rate is 35% – which is the lowest rate since the 1930’s. This $1 million exemption is in addition to the annual exclusion, which is a free pass of $13,000 per year per donee. Wealthy people are looking at making taxable gifts in 2010.
They are considering paying a 35% gift tax now, because next year the top rate will rise to 55%. That’s a huge increase in the rate. That’s not all. The value of many assets is currently depressed. Stocks, real estate, and interests in businesses are at low market values in the struggle to weather the recession (Is it really over?). Making gifts of these assets now gets them through the transfer tax system at a low value. Any future appreciation will not be subject to gift or estate tax.
When there are steep declines in the market, most folks are understandably concerned about the shrinking value of their assets. The natural urge is to hold them closer. If you are in taxable estate territory – over $1 million in 2011, you need to ask yourself if you really need to hold it all so very close. Wouldn’t it be better to take advantage of low valuation and low rates to pass more property to your beneficiaries?
It gets better. If the donor is making gifts to grandchildren or to a trust for the benefit of grandchildren, there is a major advantage. Usually large gifts to grandchild (or more remote descendants) are subject to an additional tax called the Generation-Skipping Transfer Tax (GSTT). The GSTT applies in addition to the Gift Tax and Estate Tax but in 2010, just like the Estate Tax, there is no Generation-Skipping Tax!If a single donor makes $3,013,000 million gift to one grandchild or a generation-skipping trust, in 2010, there is only a gift tax, and that at the rate of 35% over the $1 million exemption. The 2010 gift tax, after taking the $13,000 annual exclusion for gifts, would be $700,000.
Here is an example.
Contrast that with a gift in 2011, or with a death in 2011. The generation skipping tax after the $13,000 annual exclusion for generation skipping transfers, and the $1,340,000 GST exemption in 2011, would be $912,900. That generation skipping tax is added to the amount of the gift for a total gift of $3,912,900. The gift tax on that amount is $1,447,095. Add to that the $912,900 generation skipping tax, and the total tax due for the gift comes to $2,359, 995. Yikes! Compare that to this years total of $700,000 and you will see why it is such a bargain.
If you are attracted by this planning opportunity, start making plans now. Be cautious, and make sure that you know what Congress is up to this month, but be prepared to act. To take advantage of this opportunity, gifts must be made before year end and a large gift requires careful planning. It shouldn’t be rushed into at the end of the year.