Gifting Opportunities for 2010October 01, 2010
Dianne Rizzo, EA
There is good news in 2010 for high net worth individuals considering wealth transfer opportunities. Since Congress has failed to address any transfer tax reform this year, there is a growing belief there will be no new legislation in the near future. This result can be beneficial for those who are considering gift-planning opportunities before year end.
A number of factors currently paint an encouraging picture when it comes to gifting, beginning with federal rates being historically low, coupled with the decrease in value of various assets such as real estate and family businesses. The 35 percent gift tax rate is not only significantly lower than transfer tax rates after 2010, but can be reduced even further in certain circumstances.
Current law requires that the 2001 Transfer Tax Rules be reinstated in 2011, meaning the estate tax exemption will become $1 million and the transfer tax rate could jump as high as 41-60 percent. The gifts are taxable when the annual exclusion amount of $13,000 per donee is exhausted, and taxes are due when the lifetime unified exemption credit amount of $1,000,000 is reached. Special rules apply for payment of medical expenses and tuition costs paid directly to the provider.
The donee assumes the basis and holding period of assets received by the donor. If the fair market value of the asset transferred is lower than the donor's basis, the donee loss on disposition is calculated using the fair market value at the date of transfer – not the donor's basis. For gain calculations the donor's basis is used. Neither gain nor loss is recognized if the donee sells the asset at a price between the fair market value at the date of the gift and the donor's basis.
With these factors in mind, 2010 appears to be an optimal year for implementing gifting strategies. Once an individual has determined that gift-planning is indeed a path to seek this year, there are several different avenues that can be pursued. Below are some planning ideas to consider:
Inter-Vivos Trusts – Timing is often critical in giving gifts, given the three-year statute of limitations for inclusion of any gift tax in a donor's taxable estate. The timeline begins with the completion of the gift, not the payment of the gift tax. Therefore, the earlier the gift is given, the less a gift-tax risk for the donor's estate. Some trusts, such as a lifetime QTIP (Qualified Terminable Interest Property) Trust, when structured properly, can mean substantial future savings.
Net Gifts – These are gifts where the donor requires the donee to pay any resulting gift tax, which can lead to tax savings for the donor, especially with the IRS allowing any state gift tax assumed by the donee to be taken into account.
Discounting Family Debt – Individuals with substantial intra-family debt can consider debt forgiveness on a net gift basis. This would enable a net gift arrangement to act as a discounted payoff of that debt. The debt payoff would not only be at a heavily discounted rate but also eliminate the debt from estate tax.
Discounting Values – Individuals considering gifts in 2010 may want to consider strategies designed to reduce the taxable value of the gift. Family Limited Partnerships (FLPs), minority interests and charitable lead trusts are some examples of effective strategies for reducing taxable value.
- Gifts from Existing Marital Trusts – The 35 percent (or less) gift tax rates in 2010 is dramatically lower than the 41-60% transfer tax rate that be in place after this year. Existing Marital Trusts are required to be included in the surviving spouse's estate; using these assets as part of a gifting plan would reduce future estate tax exposure.
Another area where gifting may be an important consideration this year involves the planning for an individual battling a terminal disease. A number of transfer strategies exist in 2010 that can provide future protection.
Trusts Created in 2010 – This would benefit a married couple where one spouse is expected to die in 2010. The healthier spouse can transfer assets to the terminally ill spouse and establish a QTIP Trust and/or testamentary bypass. If the expected death should occur, neither trust will be included (with the exception of income) in the healthy spouse's estate.
Charitable Bequests – For individuals with charitable beneficiaries in their wills expecting to die in 2010, gifts made prior to death allow for the charitable income tax deduction while also reducing the estate value. With no estate tax in place for 2010, the charitable bequest in the will is tax neutral. A revision to the will is necessary to avoid duplication of the gift.
Gift-Splitting – In situations where one spouse is in poorer health than the other, gift-splitting allows the healthier spouse to pay the total gift tax, thus eliminating the chance that the gift tax will be included in the taxable estate of the less healthy spouse.
- Death-bed Gifts – Annual exclusion gifts to family and friends have always been an opportunity for estate reduction, provided the check clear during the donor's life. Other strategies for reducing estate tax by gifting are available for individuals passing away after 2010. The use of annual exclusion gifts to replace specific bequest in a will can reduce the possible estate tax liability. This also would require a revision of the will, to avoid duplication.
The bottom line is the strategies listed above – and possibly many others – could cease to exist or become much more limited after 2010. The time is now for estate and gift planning advisors to examine the possible benefits and unique planning opportunities.