September 20, 2010
Gifting in 2010
By Gina Lucibello, Supervisor, Tax & Business
Congress is unlikely to pass any transfer tax reform in 2010. Therefore, 2010 could be the best time for gifting for the following:
- Historically low federal rates that encourage certain gifting strategies,
- Low asset values in both real estate and family businesses,
- Congress or the IRS could be curtailing intra-family transfer discounts in the near future,
- Gift tax is a tax-exclusion tax; therefore the effective tax rate for gifts in 2010 (when the donor survives the gift by three years) is only 25.93%,
- Restoration of the 2001 transfer tax rules in 2011 is increasingly probable, the estate tax exemption would go to $1.0 million and the transfer tax rate would be at 41-60%,
- The likely significant increases in federal and state income tax rates make “income shifting” a benefit.
Payment of gift taxes can have a significant advantage over the payment of estate taxes. This is due to the fact that gift tax is calculated on a tax-exclusive basis, meaning the tax is based on the value of the property transferred. Meanwhile, estate tax is calculated on a tax-inclusive basis, meaning the tax is based on the value of property transferred plus any amount used to pay the estate tax. However, it is possible for the gift tax to become a tax-inclusive tax if the donor fails to survive the gift by three years. (The date of the gift begins the three year statute, not the date of the gift tax payment.)
The donee of a gifted asset assumes the tax basis of the donor. This rule applies unless the donor’s basis in the asset exceeds its fair market value. If the donee sells the asset for a gain, the donee uses the donor’s basis. If the donee sells the asset for a loss, the donee uses the fair market value as basis.
Many individuals have a gifting plan, and if so, It is advised to wait to complete the gift until the end of 2010 to ensure the following are accounted:
- Family changes, such as divorce or the birth of a child, that
- Legislative changes that create new gifting opportunities or unexpected traps,
- If the donor dies before the end of 2010, the partial step up in basis (of up to $4.3 million) would be lost. The gift would also create an unnecessary transfer tax.
It is important to start planning now so that cash is available to pay possible applicable gift taxes that will be due by April 15, 2011.