Effect of the 2001 Tax Act on Gift Taxes

While estate taxes are completely repealed for 2010, gift taxes remain in effect, with an applicable $1 million lifetime exemption.  The top gift tax rate has been reduced from 45% to 35% for 2010, in line with the highest marginal income tax rate.  Many clients question why gift taxes were retained for 2010 when there is complete repeal of estate and generation skipping transfer taxes; most tax and estate planning attorneys believe the gift tax was retained in order to prevent taxpayers from reducing their income tax liability by gifting income-producing assets to family members in lower tax brackets.

Gift Taxes Prior to the 2001 Tax Act

Prior to the enactment of the 2001 Tax Act, many estate planning lawyers encouraged clients to make taxable gifts, because the gift tax was more cost-effective than estate tax.  Although estate and gift tax shared identical rate structures, gift tax was imposed on the amount exclusive of the tax payable, whereas estate tax was imposed on a full amount including the tax.  The end result, provided the donor survived three years from the date of the gift, was that gift tax was effectively one-third cheaper than estate tax.  Taxable gifting was therefore an attractive tax planning strategy prior to the estate tax repeal.

Gift Tax Strategies

Taxable gifting is still a viable estate tax planning strategy, because the 35% gift tax rate for 2010 is still a significant savings for the 55% top estate tax rate in 2011.  Taxable gifts are those that are in excess of $13,000 per year, per beneficiary.  Many trust and estate attorneys are advising their clients to make taxable gifts this year, taking advantage of the decreased gift tax rate of 35%.

Strategies leveraging the annual gift tax exemption include the use of irrevocable trusts known as “Crummey Trusts” after the name of the definitive case in this area.  Since each taxpayer can give up to $13,000 per year to a beneficiary, collectively a married couple could gift $26,000 to a beneficiary each year, free of gift tax, and also thereby removing $26,000 from their estate for estate tax purposes.  With Crummey Trusts, each parent establishes an irrevocable trust naming their spouse as trustee, then uses the annual gift tax exclusion amount to make contributions into the trust free of any gift tax.   The Crummey Trust is a good option for clients who are not ready to give up control of their assets; with a Crummey Trust, parents can shelter $26,000 per child while serving as trustees of the trusts, thereby retaining complete control over the assets of the trust during their lifetime.  Gifts can be leveraged even further by using the funds gifted to the trust to purchase life insurance.

For clients with philanthropic intentions, estate planners are leveraging gifts further by using strategies such as charitable lead annuity trusts.  The appropriateness of such strategies, as with any wealth preservation planning strategy, requires a careful assessment of the ability of the client to tolerate risk.

Advanced Tax and Estate Planning Strategies Require Experienced Counsel

Oklahoma estate planning attorney Guy Jackson has over 25 years of experience in estate planning, probate, and trust administration, with particular expertise in estates involving complex tax and estate planning issues.  For representation in a probate or trust administration matter in Oklahoma City, Edmond, Tulsa, or throughout Oklahoma, contact The Jackson Law Firm.