December 23, 2010

Congress passed the 2010 Tax Relief Act (“Act”) which was signed into law on December 17, 2010. In addition to extending certain income tax cuts, the Act provides for new estate, gift and generation-skipping transfer (“GST”) tax provisions. Many of the new provisions continue through 2011 and 2012. However, there is one major planning opportunity available only through December 31, 2010.

1.      2010 Gifts Without GST Tax. If you have grandchildren, you may want to take advantage of the Act’s provision that establishes a tax rate of zero percent on GST gifts made in 2010. The gift tax exemption for 2010 is still set at $1 million. If you have not used your gift tax exemption and want to make transfers to grandchildren (or younger generation), there is a short window of opportunity to make these gifts without using up any of your GST exemption.

2.     How to Make 2010 Gifts to Grandchildren Without GST. The Act authorizes gifts outright to grandchildren, to custodian accounts for grandchildren or to a trust for grandchildren. If made in trust, it must be a direct skip trust in which the donor’s child does not have any interest.

3.     Other Year-End Gifting. Existing rules on year-end gifts remain the same. You may make annual exclusion gifts of $13,000 per recipient ($26,000 if from a married couple). You may also make direct payments to an educational institution or health facility on behalf of another.

4.     2011 and 2012 Changes. The Act provides for a $5 million gift tax exemption and a $5 million GST exemption during 2011 and 2012. If you have already used your $1 million gift tax exemption in effect for 2010, you may want to defer larger gifts until 2011 to avoid paying gift tax.

5.     Prompt Planning Needed. If you are contemplating a year-end gift to take advantage of the GST exception, then you must act extremely quickly. Please contact us at once if you want to consult on an individual basis.

This advisory does not focus on other changes occurring in 2011, 2012 and thereafter. Please look for future updates to be posted.

This document is provided by Crowe & Dunlevy, P.C. for educational and informational purposes only and is not intended and should not be construed as legal advice.