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| Gifting can be an efficient means of passing wealth to the next generation. There is currently a gift tax exclusion of $13,000 per year per done e. No gift tax return is required for gifts that do not exceed the annual exclusion amount. If you have been considering gifts in excess of the exclusion amount, it may be advisable to make these gifts before December 31. 2010 is a transitional year for estate and gift taxation. The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) eliminated estate taxes for deaths occurring in 2010, reduced the federal gift tax rate from 55% in 2001 to 35% in 2010, and eliminated the Generation Skipping Transfer (“GST”) tax for 2010. Unfortunately, EGTRRA is scheduled to sunset on December 31, 2010. Starting in 2011, the federal estate tax returns with a vengeance. The estate tax exemption equivalent drop sto $1 million, the federal gift tax rate jumps back to 55%, and the GST returns. Proposals to extend or modify EGTRRA have surfaced in both Houses of Congress, but no legislative action is imminent. The tax climate after December 31, 2010 is uncertain at best and may even be hostile. There are several other tax factors to consider before making a taxable gift of assets other than cash. When a gift is made, the asset gifted is valued at its value on the date of the gift. All future growth and income on the gifted asset belong to the donee. The gift removes not only the current value of the asset from the donor’s taxable estate, but also all future income and appreciation. This creates a strong incentive to make gifts of appreciating assets. There is always a “however” when dealing with taxes. The “however” in gifting appreciating assets is that the donee takes a donor’s tax basis in the asset (“carry over basis”). The donor’s basis is usually what he or she paid for the asset, not its current value. Transfers at death after December 31, 2010 will be subject to a different rule. These assets will receive a step-up in basis to the date of death value. Therefore, there may be a disincentive to transferring appreciated assets by gifts during lifetime rather than after death. The next “however” is that the current maximum capital gains rate is generally 15% (28% for collectibles). The15% or even 28% capital gains rate compares favorably with the 35% gift tax rate. It is less expensive to pay a15% capital gains tax than a 35% gift tax. The high tax rates and uncertainty surrounding gift and estate taxes make gifting very complicated. However, it appears that in general, if you are planning to make a taxable gift, it may be better to make it in 2010 than in2011. If you have any questions regarding gifting, please contact your advisor at Petrie & Stocking. |