2010 May Provide A Limited Time Opportunity to Avoid The Generation Skipping Transfer (GST) Tax

With all the discussion and focus on the elimination of estate taxes for 2010, in some planning circles, the repeal of the 2010 generation skipping tax (GST) has gone unnoticed. Due to this repeal, there are some unique planning opportunities. Congress’ failure to act this year may prove a great savings opportunity for multi-generation planning. With greater after tax gift values available there remains a larger source of premiums to support the overall estate plan.

Background

Estate and GST taxes have been repealed through December 31, 2010. While gift taxes apply in 2010, they are at a maximum federal tax rate of 35%. This is 10% less than the maximum rate in 2009 and 20% less than the maximum rate scheduled to be in place in 2011. The provisions of EGTRRA provide that in 2011, the estate and GST taxes are to be reinstated with a $1 million exemption(1) and a 55% top federal rate(2). The gift tax will also return to pre-2001 levels in 2011(3)

What Are The Planning Opportunities?

For 2010, gifts directly distributed to grandchildren are a viable option. Although they remain subject to gift taxes, they should avoid GST . One consideration is that clients who make large gifts that would be subject to taxation should do so this year , when the gift tax rate at 35%. They can avoid GST and pay a lower gift tax than may be available at a future date. In addition, this may be a good time to make a gift of assets which have depressed fair market values due to market conditions.

Another opportunity involves the timing of distributions from existing trusts. Trust distributions may be subject to the GST tax when:

• The trust makes a distribution to beneficiaries two or more generations below the original donor or
• The trust terminates and assets pass to beneficiaries two or more generations below the original donor

These trusts may not have to deal with GST tax in 2010. If the trust allows, distributions may be made early or the termination may be triggered to occur in 2010.

A planning opportunity exists with a surviving spouse that is a beneficiary of a marital trust that will be taxed at death. A trustee can make a distribution to them and then make gifts to children or grandchildren now. This would allow them to take advantage of the 35% gift tax rate and the ability to make such gifts in long-term trusts that may escape GST tax.

Lastly, an opportunity may exist for clients who are considering funding grantor retained annuity trusts (GRATs), but who wish to have the remainder after the GRAT period continue in a trust for grandchildren. Generally, they must allocate the GST exemption after the estate tax inclusion period (ETIP), usually at the termination of the GRAT . Some practitioners believe that there is the possibility that a GRAT created in 2010, before the estate tax and the GST tax are reinstated, will not be subject to the GST tax. If this position is accurate, the GRAT and any trust into which the GRAT assets pass should not be subject to the GST tax.

With all these techniques, remember that there remains an outside risk that the GST tax may be re-enacted retroactive to January 1, 2010 and the GST tax might apply to transfers made in 2010. There may be ways for certain transfers to be made which allow them to be “undone” should this possibility become a reality. Before implementing any of these techniques, your client should first seek tax and/or legal advice.

(1) The GST exemption is $1 million, indexed for inflation
(2) With an additional 5% surtax for certain large estates
(3) $1 million exemption, 55% top rate