United States: Transfer Tax Law Changes; GST Planning Available Only in 2010

The new federal tax law presents an extraordinary wealth transfer opportunity, but the generation-skipping transfer tax sale ends December 31, 2010.

It's old news now that late last year the U.S. Congress allowed the estate and generation-skipping transfer (GST) taxes to lapse for 2010. You've likely read reports of the several billionaires who died in 2010 and left estates that escaped estate tax.

On Friday, December 17, 2010, President Obama signed into law a tax bill that resolves—at least temporarily—much of the uncertainty regarding the transfer tax system. If Congress had not acted before year end, on January 1, 2011, the estate tax would have returned after the 2010 "gap" year to 2001 law, which imposed the estate tax at a top tax rate of 55 percent to be applied after an exemption of $1 million. Back too would have been the GST tax at a flat 55 percent rate, and the gift tax rate, which today is imposed at 35 percent, would have risen to a top rate of 55 percent.

The new tax law provides for the following:

  • Generation-skipping transfers made in 2010 are taxed at 0 percent. This includes gifts made in 2010 to grandchildren or other "skip persons," such as great-grandchildren, grandnieces or grandnephews, as well as trust distributions or other taxable events with respect to a trust that occur in 2010. In addition, each person's "GST exemption" was increased to $5 million and can be allocated to any gifts made in 2010 during life or at death that remain in trust and will pass down more than one generation level. Each person's GST exemption continues as before to be reduced by any exemption used previously.
  • For 2010 gifts, the gift tax exemption remains at $1 million and the gift tax rate remains at 35 percent.
  • In 2011 and 2012, the estate and gift tax will be imposed at 35 percent after an exemption of $5 million per person (this cumulative exemption includes all prior gifts by a person). The GST tax also will be applied at 35 percent after an exemption of $5 million. An inflation adjustment will be applied to the $5 million exemption amounts for 2012.
  • For those who died in 2010, the executor can elect to tax the decedent's assets at 35 percent after an estate tax exemption of $5 million, in which case the assets will receive a "stepped up" income tax basis equal to their fair market value at death. Alternatively, the executor can elect out the estate tax regime, in which case no estate tax would be paid and the modified carryover basis rules would apply to determine the recipients' income tax basis in the assets.
  • For IRA owners over age 70½, tax-free distributions of up to $100,000 per year through 2011 can be made to charity directly from the IRA. Charitable transfers from the IRA during January 2011 can be treated as being made in 2010.
  • The reversion to the 2001 transfer tax rates and exemptions described above is postponed until January 1, 2013.

No Generation-Skipping Transfer Tax in 2010

For those who want to benefit grandchildren or more remote descendants, the 0 percent GST tax rate is a compelling reason to complete those transfers in 2010. Even though the transfers would be subject to a 35 percent gift tax, the complete avoidance of an additional 35 percent GST tax that otherwise might apply to comparable transfers in 2011 and later makes the math easy. For example, if a 35 percent rate applies, deploying $10 million to cover the gift and gift tax in an outright transfer to a grandchild nets the grandchild about $7.4 million, with the remaining $2.6 million going to pay gift tax. Assuming a donor's remaining GST exemption is allocated elsewhere, that same $10 million deployed in 2011 at a 35 percent transfer tax rate nets the grandchild only $5.49 million, with the other $4.51 million going to pay the gift and GST taxes.

This GST tax benefit also applies to gifts made in trust before the end of 2010—the gift need not be made outright to the beneficiaries. Although the trust would be held for grandchildren initially, after a period of time it may be possible to allow the donor's children to benefit from the trust. The trust would be designed to eventually be distributed to the grandchildren because under this particular quirk in the law distribution to the next younger generation would attract GST tax. This same approach could be used where the initial beneficiaries are great-grandchildren.

A comparable opportunity for avoiding the GST tax applies to distributions made in 2010 from certain existing trusts (that are not exempt from the GST tax) to grandchildren, great-grandchildren, grandnieces or grandnephews. If such a distribution would in other years attract GST tax, it can be made in 2010 without imposition of that tax or the use of GST exemption if the trust terms permit the distribution. In some cases, it may be possible to make the distributions to a new trust for the beneficiaries.

"Turbo-Charge" Generation-Skipping Transfers in 2010

One variety of a "grantor trust" is an irrevocable trust funded with a gift from the grantor that has the following two characteristics: the trust assets are out of the grantor's estate and will not be subject to estate tax at the grantor's death, and the income on trust assets is taxed directly to the grantor as if the grantor still owned the assets. The Internal Revenue Service ruled definitively that in such circumstances the grantor's payment of the income tax on the trust's income, albeit an economic benefit to the trust and its beneficiaries, is not a taxable gift by the grantor.

By making a 2010 transfer, like that described above, into a grantor trust rather than outright to the beneficiaries, the donor can enhance the value to the beneficiaries on a gift tax-free basis as long as the donor lives. Over a long period of time, the additional gift tax-free value can be substantial.

Who Should Consider a Significant Generation-Skipping Gift Before Year End?

Those who should consider generation-skipping gifts in 2010 include just about anyone who has assets to spare and wants to benefit grandchildren, great-grandchildren, grandnieces or grandnephews in an amount that exceeds the donor's remaining balance of his or her $5 million GST exemption. However, older persons or persons in ill health with large estates that will or should pass to grandchildren stand out as particularly compelling candidates for significant year-end gifts. Although the math is the same regardless of a person's age or health, an impending estate tax levy may make a less costly gift tax more palatable, especially given the complete avoidance of the GST tax.

Where there is concern that the donor may die before year end, the gift may be deferred until the very end of this year. That way if the donor does die in 2010, there will be no estate tax or GST tax and the gift tax will not have been unnecessarily incurred.

Key Concepts

  • Gifts to grandchildren or great-grandchildren in 2010—whether outright or in trust—completely avoid the GST tax that is scheduled to reappear in 2011.
  • Making the gift to a grantor trust that causes the donor to pay the income tax as a gift tax-free benefit to the trust beneficiaries enhances the value of the gift.

Stay Tuned for Further Planning Updates

There have been significant modifications to the transfer tax system over the last decade, and the new tax law provides clarity only through 2012. There is no telling what may happen following 2012, and the $5 million gift (starting in 2011) and GST tax exemptions provide a significant opportunity to create trusts that can pass from generation to generation without the imposition of gift, estate or GST taxes. Additional updates will be provided in 2011 to address planning considerations for 2011 and 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions