Year End Estate Move - Other Than Plug Pulling

Originally published on Passive Activities and Other Oxymorons on December 22, 2010.
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Sunday, I did a brief post, on an opportunity created by the recent tax compromise.  I pointed to an article in Forbes, which explains it in some detail.  It concerns the Generation Skipping Tax.  My limited study of the GST forces me to conclude that its true role is a white collar jobs program.  Simplistically it is designed to insure that substantial pools of wealth get taxed at least once in every generation.  The tax can be triggered by a direct gift to grandchildren or a direct bequest to grandchildren.  The other trigger would be when wealth put into trust is distributed to grandchildren.  Of course it is vastly more complicated than that and has big enough exemptions that you don't have to worry about buying your grandchildren computers for Christmas.  Unless you were thinking about a Cray.

Regardless, the recent tax bill has created a limited window of opportunity with respect to the generation skipping tax.  Like the estate tax, the generation skipping tax had been repealed for 2010 to be reinstated in 2011.  The problem was that nobody could figure out exactly what that meant, what the best way to deal with it was and whether there might be a retroactive reinstatement.  The tax compromise reinstated the estate tax for people dying in 2010, although it allows them to elect out of the estate tax at the price of living with carryover basis (I suppose "living with" might not be quite the perfect choice of words).  So plug pulling remains a viable strategy for the ultra wealthy and promises to be a interesting plot twist in TV cop shows and mystery novels for the next several years. More significantly and less macarbly the act also retroactively reinstated the generation skipping tax.  There is a special wrinkle though.  For 2010, the GST rate is 0%.

So the strategic move to make is to trigger the generation skipping tax in 2010.  Who should be thinking about this ?

1. If your net worth is greater than $5,000,000 and you have not yet used up your $1,000,000 in lifetime taxable gifts now is the time to do it and the gift should skip over your children.

2.  If your net worth is even higher and you are thinking dynastically you could make a major gift on which you will pay gift tax, but which will skip your children.  Frankly if you are such a person, you are probably hearing from your advisers about this already, but you never know, so I'm mentioning it.

3. If you are involved in any way with a trust that was established since 1986 that is not GST exempt, you should be looking to see if a triggering transfer would make sense.  I'm particularly thinking about irrevocable life insurance trusts.

4. If you are related to an estate tax attorney and you are wondering why they are not going to be at home much this Christmas season, now you know why.

Much like picking a Christmas gift, it is always difficult to pick the best wealth transfer gift.  I would not suggest setting up a family limited partnership inside a week.  Too many ways to screw up.  My suggestion is a gift of cash to an intentionally defective grantor trust.  You can spend some time next year designing the perfect vehicle, which you can then sell to the new trust.

It is critical that you use a good estate tax attorney in trying to execute anything like this.  Your accountant might also be able to help you in selecting assets and running scenarios.