Wednesday, May 18, 2011

Planning in 2010 Without an Estate Tax

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The recently-concluded Heckerling Institute on Estate Planning, held in Orlando on January 25-29, included considerable discussion of what estate planners can do for their clients now that the estate tax is repealed. Although most planners had assumed that repeal would not come to pass, Congressional inaction has forced them to confront life without an estate or generation-skipping transfer tax.

While there are still those who counsel doing nothing on the assumption that Congress will act quickly to reinstate the taxes and will do so retroactively, a significant number of speakers said that Congress will not address the issue until year-end, and that the odds favoring retroactivity grow slimmer with each day that Congress fails to act.

How does a wealthy individual take advantage of estate tax repeal other than by accelerating his own demise? The gift tax, which was not repealed, offers opportunities. For gifts made in 2010, the rate is reduced from 45% to 35%. Although clients are notoriously reluctant to pay gift tax, this may be a year to do so. Those willing to go out on a limb should look at Code §2511(c), which provides that, for 2010 only, any transfer to a non-grantor trust is a completed gift. Some read this provision to imply the converse – that a transfer in 2010 to a grantor trust is not a gift. The planning opportunity described by a Heckerling speaker is to use §2511(c) to make a nontaxable transfer to a grantor trust without retaining any “string” powers under §§2036 to 2042 that would cause the trust property to be later includible in the grantor’s estate. The result is a transfer subject to neither gift nor estate tax. The IRS recently placed this idea in the “too good to be true” category by issuing Notice 2010-19, which concludes that a completed transfer to a grantor trust in 2010 is a taxable gift.

This is also a favorable year for generation-skipping transfers, due to GST tax repeal. Direct skips can be made tax-free in 2010, as well as distributions from and terminations of generation-skipping trusts that that have an inclusion rate greater than zero. Other types of GST planning may be riskier – can the 2010 repeal be used to extend the life of a GST-exempt trust by moving it to a jurisdiction without a Rule Against Perpetuities? Although this would not generate a GST tax in 2010, there is a question of whether the trust will be GST-exempt in 2011 when the tax returns.

Harold W. Pskowski, Managing Editor for Estates, Gifts and Trusts

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