2010 Tax Planning - to Gift or not to Gift 

November, 2010 - Rice M. Tilley, Jr., John M. Collins, William D. Ratliff, III, J. Mitchell Miller, Jeffrey E. Raley, Danika Hudik Mendrygal, Jeff S. Dinerstein, Jamie L. Harris, Rebecca E. Whitacre

First, the good news:

  • No estate tax on individuals who die during 2010;
  • No generation-skipping transfer (“GST”) tax on “transfers” during 2010;
  • Tax rate on gifts during 2010 is 35% (rather than 45%); and
  • Congress appears less likely to take any action to retroactively change these rules.

What does this mean? Because of low interest rates, depressed values for business and real estate and lower gift tax risk, large gifts or sales to younger generations are more attractive in 2010.

Here’s the “not so good” news: GST tax may apply to distributions in 2011 or later years to grandchildren and younger generations from trusts created this year, even though the transfer to a trust in 2010 is not subject to GST.

The rules for gifts to adult children and grandchildren are pretty clear. The gift tax rate during 2010 is 35% on all amounts in excess of the donor’s gift tax exemption (which has remained at $1,000,000), and outright transfers to adult grandchildren (or more remote descendants) will completely escape the GST tax during 2010. However, most clients prefer to utilize trusts for transfers of substantial amounts (not “outright” transfers). So, what is a client to do?


Consider making a substantial distribution before year-end directly to grandchildren (or even great-grandchildren) from an existing trust that is not exempt from GST; if permitted by the trust, such a distribution should not be subject to GST tax (however a distribution to a custodial or UTMA account may not qualify). 


If avoiding the GST tax is not important, consider a large gift in 2010 to adult children or to a trust for adult children in order to take advantage of the 35% tax rate; for clients who are not adverse to paying a tax before it is absolutely required, such a gift can result in substantial estate tax savings for their children. 


Where avoiding GST tax is important, we have suggested clients wait until January 2011 to close the transaction, at which time they will have a GST exemption of at least $1,360,000, and we will have greater confidence we can establish a trust to own the transferred assets which will not be subject to GST tax. 


If there are reasons to move forward with the transaction during 2010, we suggest revisiting the transaction in January to determine whether the trust will be fully exempt from the GST tax based on either (i) legislation or IRS rules, or (ii) filing a late gift tax return (one day after the filing date, with extensions, for the client’s 2010 income tax return) and applying GST exemption equal to the net value of the trust on the date of the return. 


If the rules are still not clear in the early part of 2011 and the client is concerned about the rapid appreciation of the trust’s assets, a new 2011 trust could be established to purchase the appreciating assets from the old 2010 trust for the then fair market value of those assets. 

If you have any questions, please feel free to contact one of the attorneys listed below.

Rice M. Tilley, Jr.*
[email protected]

J. Mitchell Miller
[email protected]

Jeffrey S. Dinerstein
[email protected]

John M. Collins
[email protected]

Jeffrey E. Raley
[email protected]

Jamie L. Harris
[email protected]

William D. Ratliff*
[email protected]

Danika H. Mendrygal
[email protected]

Rebecca E. Whitacre
[email protected]

To ensure compliance with requirements imposed by U.S. Treasury Regulations, Haynes and Boone, LLP informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

*Board Certified – Estate Planning and Probate Law and Tax Law by the Texas Board of Legal Specialization.


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