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I. Changes to Gift Tax Exemption and GST Exemption
The 2010 Tax Relief Act 2010 increased the gift and estate tax exclusion amount and generation-skipping transfer ("GST") tax exemption to $5 million per individual or $10 million per married couple splitting gifts, through 2012. This recent change in the tax law provides a window of opportunity to transfer up to $10 million of wealth gift and GST tax-free. After December 31, 2012, the gift tax exclusion will automatically revert to $1 million per individual, the GST exemption will drop to $1 million, and the rates for both gift and GST taxes will increase to 55% from the current 35% rate.
Recently, the House Ways and Means Committee Democratic staff proposed decreasing the gift and GST exemption amounts to 2009 levels beginning January 1, 2012, instead of January 1, 2013. For reference, in 2009, the gift tax exclusion amount was $1 million while the GST exemption was $3.5 million. Additionally, some commentators suggest, based on rumors emanating from Capital Hill that the "Super Committee" tasked with deficit reduction may propose a decrease of the gift tax exemption amount to $1 million in the report it is tasked to issue by November 23, 2011. Should the Super Committee include this proposal in its report, it is possible that such a decrease of the gift tax exemption amount would have an effective dates as early as November 23, 2011, though it is more likely to become effective December 31, 2011. In light of these recent developments, if you wish to utilize the current increased gift tax exclusion amount and/or GST tax exemption amount, we encourage you to call us as soon as possible. Your DDK professional is happy to discuss ways in which you can optimize these exemptions.
II. Grantor Retained Annuity Trusts
Another rumored proposal the Super Committee is considering concerns grantor retained annuity trusts ("GRAT"), which frequently have terms of five years or less. The proposal would require GRATs to have a 10 year minimum term. The IRS announced that the 7520 interest rate applicable to GRATs will be 1.4% for November 2011 - its lowest since inception in 1989. For investments likely to outperform the 7520 rate, now is an excellent time to create a GRAT of any term in order to transfer the appreciation in excess of the 7520 rate gift tax-free.
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