September 22, 2010 / 5:00 PM / 9 years ago

WEALTH MANAGER-Time running out to make U.S. grandkids rich

* Generation-skipping transfer tax has lapsed for 2010

* GST tax set to jump to 55 pct next year

* Need to make gifts directly to grandkids, not a trust

By Helen Kearney

NEW YORK, Sept 22 (Reuters) - Wealthy U.S. families have the chance to make their grandchildren rich this year without paying hefty taxes, a rare opportunity overlooked in the estate tax shuffle.

A sweeping package of Bush Administration tax cuts expire this year but have not yet been replaced by a new policy. If Congress fails to take action soon, estate and generation skipping transfer (GST) taxes — both of which were eliminated this year — will jump to 55 percent in January with a $1 million exemption.

As a result, many wealth advisers are encouraging clients to pass on assets to heirs this year.

“The generation skipping transfer tax is the less-talked-about twist this year,” said James Kronenberg, fiduciary counsel at wealth manager Bessemer Trust. “Everyone is focusing on the estate tax.”

The generation-skipping tax was introduced to stop people from avoiding a generation of estate tax payments by leaving money directly to grandchildren rather than to their children.

Last year, generous grandparents could give away $3.5 million without paying the tax, though anything above this rate was taxed at 45 percent.

Kronenberg said Bessemer is alerting clients about this window of opportunity as the year draws to a close.

There is one big sticking point. Attorneys say that to take full advantage of the GST tax break, assets should be transferred directly to beneficiaries and not to a trust. Money placed into a trust may lead to taxes when distributions are made later on.

A number of clients are unwilling to make outright gifts to grandchildren, especially if they are minors, said Kronenberg.

Still, clients with adult grandchildren are becoming more willing to transfer assets, as it seems increasingly unlikely Congress will pass a retroactive GST tax.

“In the first quarter, people believed there would be a retroactive tax and there was nothing to celebrate,” said David Handler, a Chicago-based attorney at Kirkland & Ellis. “By the fourth quarter, we’re going to be in a recess for elections and there’s limited time to make it retroactive.”

Lawyers noted that investors can hedge their GST bets with a disclaimer trust, where clients transfer assets to the trust and name their spouse as beneficiary. The spouse has nine months to disclaim interest in the trust, which would then send the assets to the grandchildren.

If the spouse disclaims and Congress hasn’t imposed a retroactive GST tax, the assets will be GST tax-free to the grandkids. There is no GST tax imposed on the spouse in any case.

Wealthy clients could establish a trust in December and see if Congress enacts a retroactive tax.

Still, many clients remain too nervous to take advantage of the anomalies in taxes this year, said Martin Shenkman, a Paramus, New Jersey-based attorney.

“Many clients are like a deer in headlights,” said Shenkman. “They’re still smarting from the recession and the uncertainty (around taxes) is paralyzing.”

Reporting by Helen Kearney; Editing by Phil Berlowitz

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