Congress is unable or unwilling to amend the law regarding estate taxes which expired at the start of 2010 creating a very unusual period for heirs of large estates.
The large exemptions which have been in effect for large family estates completely disappeared since New Years Day, 2010.
This means that there are no estate taxes for the families of high net worth individuals who die before January 1, 2011.
George Steinbrenner's heirs are saving millions, for example.
But there is another provision of the same law which wealthier families may want to exploit which does not require a tragic event like a death of the patriarch or matriarch.
There is also a one year lapse in the generation-skipping transfer tax (GST).
This is a tax that is in addition to estate taxes (none this year), income and gift taxes.
The intended purpose is to prevent people from transferring assets too many generations down the line without paying tax, like gift or estate tax liabilities.
Gifts have to meet certain conditions to qualify for this break on the GST.
Only outright gifts qualify, not putting money into a trust.
But, it can be done with family limited partnerships, for example.
The idea of putting the gift into a tool like this is to keep a young person from getting premature control over financial assets and possibly squandering them.
This can be an effective means to move a portion of an estate to the second generation or grandchildren now while this one year window allows a significant savings on the taxes that may be due.
This year's donors will still have to pay the gift tax which is now at a maximum rate of 35%.
It has not been this low since 1934.
Unless Congress takes action on this and changes the law after the elections, the gift tax will rise to 55% next year, which is where it was before Bush tax cuts of 2001 began to take effect.
A donor is allowed to exempt a maximum amount which will not be subject to generation skipping gifts.
In 2009,the limit was $3.
5 million and next year it will probably be around $1.
06 million (The exact level has not been confirmed by the government).
This year there is no GST if you structure a gift correctly.
J.
P.
Morgan recently did a study on this strategy of minimizing taxes on gifts and found that the net benefit to a recipient from a $1 million gift made in 2010, instead of 2011, would be $305,565.
The advantage may increase when considering the assets potential appreciation.
Making a taxable gift to a grandchild or other qualified person, may be a smarter tax move than just leaving the same amount to the person through the estate, according to J.
P.
Morgan.
For every $100 of a gift in 2010, the grandchild gets $74, as compared to $42 in 2011.
To design an appropriate strategy for your situation, you should consult with a tax professional and/or attorney who can guide you through the qualification steps and analysis.
Many families are looking into this because of the unprecedented opportunity to save thousands in taxes but some have hesitated in implementing the last steps.
They want to wait until later in the year to see if Congress doesn't enact a retroactive estate and GST bill at the last minute.
This seems to be a slim possibility with the inertia in Washington right now.