Possible Repeal of the Estate Tax Is No Reason To
Forget About Gift Tax Planning
by Mary E. Vasquez, Esq.
On February 17, 2005, two Congressional bills were introduced before the House of Representatives and the Senate titled the “Death Tax Repeal Permanency Act of 2005” (the “2005 Act”). The bill is designed to make the repeal of the estate tax permanent, rather than setting forth a gradual repeal with the possibility of revival in 2010, as was established in the 2001 Tax and Relief Reconciliation Act (the “2001 Act”). Currently, the 2005 Act is making its way through the House Ways and Means Committee and the Senate Finance Committee, and on track to be given to the President before the end of this Congressional Session.
Regardless of what may happen with the 2005 Act, taxpayers should realize that the gift tax, albeit in modified form, will likely remain intact.
While Congressional and administrative agendas may vary every couple of years, many believe that it is necessary to retain the gift tax because a complete repeal of all transfer taxes would lead taxpayers to drastically reduce, or altogether avoid, income taxes by way of transfers to relatives or others in lower tax brackets. This would also hamper any reinstatement of the estate tax, as taxpayers could also likely start transferring assets from older generations to children or grandchildren thus eliminating the potential estate tax liability for generations. Additionally, retaining the gift tax after repeal of the estate tax would also appear to discourage lifetime gifts in excess of the gift tax applicable exclusion amount, because holding the property until death would result in no tax being imposed on the estate. Regardless of the “why” the gift tax was retained, let’s look at the “how” the gift tax will effect you today and in the future.
In 2005, the Estate/Generation Skipping Transfer (GST) tax credit amount is $1.5 million. This amount is scheduled to increase under the 2001 Act to $3.5 million in 2009, or may be permanently repealed under the 2005 Act. However, such increases are not applicable to the current gift tax rates. Thus, the gift tax exclusion amount will remain constant at $1million and will not be indexed for inflation over the years.
Assuming the 2005 Act is signed into law, the Estate and GST taxes will have been repealed, yet the gift tax will still remain in place. The gift tax will be computed using a rate schedule having a top marginal rate of 35%, to match the top marginal income tax rate, under the terms of the 2001 Tax Act [see IRC § 2502(a)(1)]. The gift tax will be imposed for each calendar year after 2005 in an amount equal to the excess of (1) a tentative tax (computed using the “new” rate schedule held over from the 2001 Act) on the aggregate sum of the taxable gifts for such year, and each preceding year, over (2) a tentative tax (computed using the “new” rate schedule) on the aggregate sum of the taxable gifts for each of the preceding calendar periods.
The top gift tax rate will be 35%, which will apply to amounts over $500,000. The remainder of the rate schedule will contain marginal rates ranging from 18% to 34%, mirroring the rate schedule as it existed prior to the changes made by the 2001 Tax Act and possibly the 2005 Act. For example, amounts gifted that exceed $250,000 but not $500,000 will be taxed at a marginal rate of 34% under the gift tax rate schedule.
Example: John Doe makes a taxable gift of $2 million in 2005 (assuming the 2005 Act is law). The tentative tax on this gift under the “new” rate table would equal $680,800. Assuming a gift tax applicable credit amount of $345,800 (effectively, an applicable exclusion amount of $1 million), the net tax on the gift would be $335,000.
Therefore, it is imperative that you talk with your tax advisor and/or attorney, on the best lifetime gifting structure for you. The basic benefits of gift tax planning, including opportunity shifting and asset discounting, should still be used to maximize the period during which the low 35% maximum gift tax rate is in place. Use of existing tools will minimize the impact of a new administration’s agenda and reinstatement of the estate tax. Regardless of whether you initiate a lifetime gifting plan or not, it is imperative that steps are taken to plan and preserve your estate, so as to create the ultimate legacy for your heirs.
Top | Back
