Saturday, September 11, 2010

When is a 35% Gift Tax a Bargain? Right Now!

It's not for everyone, but for a lucky few - particularly those with grandchildren, the 35 per cent gift tax may be the biggest bargain in history. The most recent New York Times Wealth Matters, A Year to Give to Your Heirs, and Save on Taxes, explains why. 

In short, if you can't pass wealth estate tax free by dying this year, you can do it at a bargain  gift tax tate instead of waiting until January 1, when the rate shoots up to 55 percent.

But wait, there's more! Uncle Sam knows most of us prefer giving to grandchildren, so he (through Congress) enacted a Generation Skipping Transfer tax, a tax equal to the estate tax which is levied on top  of the gift tax and estate tax.

Even in the 2001-2009 world of increasing exemption amounts (from $1,000,000 to $3,000,000) and decreasing tax rates (from 55 percent to 45 percent), gifts to grandchildren over the exempt amount could incur a 100 percent tax. Under current law, when the exemption and rates return to the 2000 levels, such a gift could incur a tax of 140 percent. In this context, a 35 percent tax looks like a real bargain.

But letting the tax tail wag the dog is not always the most prudent choice. From a purely tax standpoint, you can avoid the Generation Skipping Transfer tax in 2010 by leaving a gift to grandchildren outright, rather than leaving the gift in trust. But is that a good idea? A trust beneficiary's inheritance can be protected from creditors, predators,  divorce and even poor judgement. An outright gift - even one which avoids the extra Generation Skipping Transfer tax - can be lost in the blink of an eye.

Which is more important? Like so many other estate planning questions, the best answer is "it depends." Specifically, it depends on your particular circumstances.

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