Wealthy may ring out 2010 with tax-minded gifts

NEW YORK (Reuters) - December is the season of giving, but quirks in the estate tax may prompt some wealthy seniors to be especially generous this year.

A man sits with his computer at a furniture and chinaware booth during the Summer Fair in Moscow July 4, 2010. REUTERS/Sergei Karpukhin

Without action by Congress, estate taxes are set to spike on January 1 from zero to 55 percent, the highest in a decade.

Most observers expect lawmakers to reduce the tax as part of negotiations over extending Bush-era income tax cuts, but no one can be sure that will happen, or when. Thus, giving away some wealth to reduce the size of estates may be wise, planners say.

“Folks are doing a lot of sitting and waiting to see what happens,” said Jean Gordon Carter, a partner in the Hunton & Williams law firm in Raleigh, N.C. “December 31 might be a very popular gifting day.”

The incentive to give stems not just from a looming increase in the estate tax, but also from the lowest tax rate on gifts in a generation -- a maximum of 35 percent. That top rate was 45 percent in 2009 and jumps to 55 percent next year unless Congress acts.

“One thing we urge clients to think about is making taxable gifts this year at essentially a bargain-basement 35 percent rate,” said Ken Weiss, head of the estate planning practice at law firm McGlinchey Stafford in New Orleans.

Individuals can also give as much as $13,000 to each beneficiary tax-free.


Low interest rates have also made this a good time to set up a grantor retained annuity trust, or GRAT, another way to help shield nest eggs from estate taxes, Weiss said.

With a GRAT, a person puts assets in a trust and receives an annuity, or annual income, for a set period in exchange. As long as the assets appreciate by more than a “hurdle rate,” based on federal borrowing rates, any appreciation above the hurdle rate goes to beneficiaries tax-free.

In December, the hurdle rate falls to 1.8 percent, an all-time low, making GRATs especially appealing, Weiss said. The hurdle rate was 2 percent in November and 3 percent at the start of 2010.

Democrats have pushed for curbs on GRATS that would limit their benefits, “so people concerned about legislation restricting GRATS in the future should do something this year,” Weiss said.

Irrevocable life insurance trusts can also limit tax liabilities. When life insurance is acquired through a trust instead of outright, insurance proceeds are not part of a person’s taxable estate, attorneys said.

The estate tax lapsed this year as part of a phase-out passed by Congress under President George W. Bush in 2001. The fate of the tax is part of a big debate in Congress over an array of Bush-era tax cuts that expire this year.


Without congressional action, not only will the estate tax jump, but the size of estates exempt from it will fall to $1 million for an individual, from $3.5 million in 2009, subjecting many more people to the tax.

Many Republicans want to scrap the estate tax but some have backed a compromise rate of 35 percent, while Democrats have argued for keeping the rate at its 2009 level of 45 percent.

Republican wins in the November 2 elections, which gave them control of the House but not the Senate, may assure that any compromise is closer to Republican targets.

Amid the uncertainty, “people are reluctant to do anything dramatic,” said Bradley Frigon, a Denver estate planning attorney. “When the 2011 changes kick in, I think that will motivate people to start saying, ‘This really does impact me.’”

Both gifts and trusts have some downside, attorneys said. The biggest is that both could be wasted effort if Congress decides to exempt more estates from taxes next year.

The lack of clarity and potential for a big tax jump have created a frustrating year-end for tax planners -- and agonizing decisions for families.

“I’ve heard of people making sure that they have advance directives in place and telling their families if they go into the hospital at the end of the year, they don’t want any extraordinary measures to be kept alive,” Weiss said.

Reporting by Dena Aubin; Editing by Dan Grebler