It is commonly said that there are only two certain things in life: death and taxes. 2011 seems to be the exception. We are nearing the end of 2010 and we still don’t know how dividends and capital gains will be taxed or what the wealth tax rate will be in 2011. This makes it difficult for anyone to come up with an accurate financial plan for the coming year. . One thing we do know is that the current economy has depreciated investments and real estate. This makes it a great year to give away assets at a greatly reduced tax cost.
The free transfer of ownership of a property will generate a gift tax. However, there are two exemptions from the gift tax. First, gifts of up to $13,000 per person per year (in 2010) are not subject to tax. In addition, an individual can make gifts of up to this amount to as many people as he likes each year. The exemption allows a married couple to combine their individual gift exemptions and give up to $26,000 per recipient per year without incurring any gift tax liability. There is a lifetime gift limit of $1,000,000; any gift in excess of that amount includes a gift tax.
Consider 2010 a good year to be generous. Generally, any gift you make now and any future appreciation will come out of your estate at the time of your death and will not be subject to estate tax. The fall in the stock and real estate markets created discounts for almost all asset classes. Consequently, now is the time to consider giving away assets that have unusually low values. When the economy recovers, these assets will begin to appreciate in value, and that future appreciation will occur outside of your estate. The top gift tax rate is currently at an all-time low of 35%, and under current law, the rate will increase to 55%. Congress is expected to enact legislation to reduce the increase, but there is no guarantee that this will happen. That’s why you should consider making large gifts to your children and grandchildren, even if it may mean paying a gift tax.
Another tax benefit of giving in 2010 is that there is currently no generation-skip transfer tax (GST) either, which was repealed for this year only. GST is a separate tax that applies, in addition to any inheritance or gift tax, to transfers to grandchildren or future generations. This tax is levied at the highest wealth tax rate and is intended to replace the wealth tax that is effectively avoided on omitted generation. The GST tax is expected to be reinstated next year at a rate of 55%. Therefore, the end of 2010 is a good time to give gifts to grandchildren and descendants of the younger generations. The donation can be made directly, in the form of a Limited Liability Company, Limited Partnership or trust.
Given the uncertainty of current economic and tax legislation, great care and deep reflection are required to execute financial and estate plans. At the very least, a prudent person should review his current estate plan and seek the advice of his estate planning attorney or tax advisor to ensure that it is consistent with his goals and objectives.