Now may be the time to consider some unique estate planning opportunities while they still exist.
Generation Skipping Transfer Planning
Transfers to grandchildren and more remote descendants are normally subject to the imposition of the generation skipping transfer (or “GST”) tax in addition to gift and estate taxes. Along with the estate tax, the GST tax has been repealed for 2010. In addition, the gift tax rate has been reduced to 35% for 2010.
Clients who are interested in reducing the tax burden associated with shifting their wealth to lower generations may benefit from making transfers to their grandchildren (and/or more remote descendants) in 2010 while the gift tax rate is relatively low and the GST tax has been repealed.
On January 1, 2011, both the estate tax and the GST tax are scheduled to be reinstated, and the gift tax rate is scheduled to increase. Unless Congress takes additional action, the following changes will take place at the beginning of the year: (1) the estate tax will return with a top marginal rate of 55% (up from 45% in 2009) and an exemption amount of $1 million (down from $3.5 million in 2009); (2) the GST tax will return with a flat rate of 55% (up from 45% in 2009) and an exemption amount of approximately $1.3 million (down from $3.5 million in 2009); and (3) the gift tax rate will increase to 55% (up from 35% in 2010 and 45% in 2009).
Clients who have created non-GST exempt trusts, or who are beneficiaries of non-GST exempt trusts, may also want to explore whether it would be advantageous to make distributions from such trusts to grandchildren or more remote descendants, or even to terminate such trusts, in 2010 to take advantage of the GST tax repeal.
Reinstatement of the estate and/or GST taxes retroactively to all of 2010 remains a possibility, but it is becoming less likely that either tax will be reinstated for 2010. Even if legislation is passed attempting to make the taxes retroactive, there is a question as to whether such legislation would be held constitutional by the courts. Taft attorneys will continue to monitor the estate and GST tax proposals being considered in Congress, including the bill recently introduced by Senator Mitch McConnell (R-KY) known as the "Tax Hike Prevention Act of 2010" (S. 3773).
A grantor retained annuity trust (or “GRAT”) can be an effective means for transferring high-yielding and/or rapidly appreciating assets to children and other beneficiaries with minimal estate and gift tax consequences. A GRAT’s success depends on whether its assets outperform a certain rate (known as the “7520 rate”) set by the IRS. The 7520 rate has fallen to an exceptional low: 2.0% for GRATs created in October. Consequently, this may be the right time for clients to consider the creation of one or more GRATs as a part of their estate plan, especially when combined with depressed asset values and possible valuation discounts.
This opportunity may not last. In addition to the possibility that the 7520 rate will increase, several bills have been introduced in Congress that would limit the availability of GRATs by requiring that the term of a GRAT be at least 10 years. Because the grantor of a GRAT must survive the term of the GRAT for the GRAT to succeed, it is common to use terms shorter than 10 years.
Taft’s Private Client group lawyers are available to help clients analyze opportunities for tax savings and address issues with respect to estate, gift and generation-skipping transfer tax planning. We encourage you to contact us with any questions.