Is it time to pay gift tax?

There may be only six months left before the lifetime gift tax exemption reverts from its present $5.12 million to $1 million and the gift, estate and generation-skipping transfer (“GST”) tax rates jump to 55%. Unless Congress enacts legislation providing otherwise, these changes will occur on January 1, 2013.

Many clients have taken advantage of the current opportunity to transfer the increased amount from their taxable estates at no Federal gift tax cost, often protecting those transfers from the GST tax as well. If you have not taken advantage of this opportunity, we urge you to consider it.

The present lower gift, estate and generation-skipping transfer tax rates are of equal significance. For those who have already used their exemptions (or plan to do so), there is a potential benefit from (i) making gifts and paying gift tax now (instead of gift tax or estate tax later), and (ii) making gifts now to or in trust
for grandchildren (or more remote descendants) and paying gift tax and GST tax at today’s lower rates.

The savings come from both the 35% tax rate, as well as the method by which gift, estate and GST taxes are calculated. You can use a dollar this year to transfer 55 cents to or in trust for a grandchild and pay 45 cents in gift and GST taxes. However, if you wait and leave the money in trust for a child, and then to a
grandchild, if the tax rate reverts to 55%, the estate and GST taxes will be 80 cents, leaving only 20 cents for the grandchild. Thus, a gift to a grandchild this year may be almost three times as valuable.