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Limited Opportunity to Avoid GST Before 2011

Posted Monday, December 27, 2010 by Michael A. Larson

alt text Recent tax changes under The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Act”) have created a small window in 2010 for taxpayers to avoid application the Generation Skipping Transfer tax (“GST”) on gifts to their grandchildren or younger generations.

The GST tax is imposed on gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor, e.g. grandchildren. Originally imposed to combat certain life estate gifting strategies that completely avoided estate taxes, the GST effectively prevents the avoidance of one level of estate tax by means of making direct or indirect gifts to the donor’s second generation beneficiaries.

Due to the recent changes made by the Tax Act, transfers otherwise subject to the GST will continue to be subject to the GST, but at a -0- percent tax rate if they are made in 2010. As such, these transfers will be exempt from the GST but will not require use of the GST exemption. Note that donors must still consider potential gift taxes associated with any transfers made in 2010. However, donors that have not used their $1,000,000 lifetime gift exclusion can gift up to the unused exclusion and avoid both gift tax and GST. As with all estate and transfer tax planning, there are a number of considerations that need to be taken into account before deciding to make such a gift, but in the right circumstances, this once on a lifetime opportunity could save substantial taxes on gifts to grandchildren and younger generations.

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