Type: Law Bulletins
Date: 11/23/2010

Unprecedented Opportunities for Tax Savings on Gifts in December

Gifts to children and grandchildren:  The federal gift tax rate is at an unprecedented low of 35% in 2010. In addition, the generation-skipping transfer (“GST”) tax is repealed for 2010. Due to these facts, this is an ideal time to make gifts to grandchildren. Gifts should be completed by December 31, 2010, because on January 1, 2011, the GST tax is scheduled to return to 55% and the 35% gift tax rate will increase to 55%.

  • It is theoretically possible that the GST tax could be imposed retroactively, but there are strong arguments that such a retroactive action would be unconstitutional.
  • Those wishing to make a gift to grandchildren into a trust should confer with an estate planner. There are possible unresolved tax issues concerning the use of trusts to receive gifts in 2010.

GRATs at a record low rate:  Throughout 2010, Taft has recommended that clients use grantor retained annuity trusts (“GRATs”). A GRAT can be an effective means for transferring high-return and/or rapidly appreciating assets to children and other beneficiaries with minimal estate and gift tax consequences. The success of a GRAT depends on whether its assets outperform a certain rate (known as the “7520 rate”) set by the IRS.

  • The 7520 rate is 1.8% for GRATs funded in December. This is the lowest 7520 rate ever. To take advantage of this rate, the GRAT needs to be created and the assets transferred into the GRAT by December 31, 2010.
  • The opportunity for short-term GRATs may not last. 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.

Gift of stock:  Those who plan to make a gift of stock should not wait too long. Transfer agents may be extremely busy in December and likely will have cut-off dates, possibly a week or more before year end.

Attorneys in Taft’s Private Client group are available to discuss these opportunities. We encourage you to contact us with any questions. In the meantime, we wish all of our clients and friends a very Happy Thanksgiving.

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