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Financial Planning > Tax Planning

Generation-Skipping Tax: How to Save $20 Million Before 2011

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What a difference a day will make! There is a provision in The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 legislation that has estate planners talking. For 2010, there is no generation-skipping tax (GST). “The zero GST tax for 2010 was not certain,” David Bokman, chief wealth advisory officer at GenSpring Family Offices, told in an e-mail message on Wednesday. “The tax had been repealed, but many thought it would be brought back retroactively.”

But in 2011 and 2012, the Gift Tax will be 35% and the GST will also be 35%, so there will be double taxation when skipping generations, at least through 2012. That is part of the new law. What will happen after that, no one can tell.

Only Nine Days to Take Advantage of an ‘Awesome Loophole’

For now though, there is an “awesome GST tax loophole,” according to Ben Ledyard (left), director of wealth strategies at Silver Bridge, so there are only nine days left in 2010 to take advantage of it. He calls the opportunity “huge” and this is why: “For wealth managers whose clients want to transfer very large amounts of assets to grandchildren, this can make a huge difference,” Ledyard noted.

“The big news is that the GST tax rate is 0% for 2010, and will go up to 35% for 2011 and 2012,” Ledyard said in an e-mail message.  “While the gift tax lifetime credit remains $1 million for 2010 and increases to a new ‘unified’ system with the estate tax (reunified) to $5 million and $10 million for married couples, the GST tax rate is 35%."

"In a nutshell,” Ledyard adds, let’s say, “a client had a family business worth $300 million and he/she was looking to accomplish a business succession plan to transfer one-third of the partial equity of the company to succeeding generations, in this case $100 million (assuming no discounts).”

“If they transferred the $100 million to a generation-skipping trust for the benefit of their kids and grandchildren (and great grandchildren), here is the advantage to doing it this year:”


The upshot is, if you are transferring this kind of wealth to subsequent generations, the savings can be enormous to do that in 2010. In the example used here, the tax saved by effecting the transfer in 2010 as opposed to 2011or 2012 is more than $20 million. The caveat is, as Bokman noted in his e-mail message, “clients have to be willing to pay a large gift tax in 2010, (which they could regret if the entire transfer tax system is repealed after 2012.)”

But it is anyone’s guess what the tax system will be after 2012, and if the timing is right, taking advantage of the zero GST for the next nine days of 2010 could be advantageous for clients.


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