Warning on year-end gifts

2010 has been the year for maximum restructuring of family wealth at minimum transfer tax cost, with zero taxes on generation-skipping transfers and a 35% federal gift tax rate.  However, a little-noticed element of the tax bill defeated in the Senate on Saturday should send shivers up estate planners spines, because year-end gifting might not be a slam dunk.

The legislation was introduced by Senate Finance Chairman Max Baucus to extend the Bush tax cuts except for those who earn more than $200,000/$250,000.  The legislation was defeated, of course, generating the headlines that Democrats evidently wanted. However, the bill also included an extensive reform of the estate tax, picking up ideas proposed by the President.  That portion of the bill might resurface in the legislation that comes later this week to extend all the income tax cuts temporarily.

Here's the key point. The Baucus bill retroactively reinstates the GSTT and the 45% gift tax rate to the beginning of 2010. However, transfers before December 2, 2010, are grandfathered, with the 35% gift tax rate preserved. Gifts after December 2, 2010 will be subject to GSTT and the higher tax rate. In effect, 2010 will be divided into two taxable periods for transfer tax purposes.

There's much more, but that's enough for now.

Although the Baucus bill went down to defeat, it is possible that the December 2 effective date will be retained in future legislation, on the theory that taxpayers were put on notice by the failed legislation.  Seems weak to me, but stranger things have happened. The point of treating December gifts differently would seem to be to protect future estate tax revenues by heading off massive taxable gifts at low rates.

Ironically, those who prudently deferred their major gifts to the end of the year, to see what Congress might do, would be the ones losing the utilization of the low gift tax rate.