Huffpost Business
The Blog

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Robert Lenzner Headshot

Obama's Surprise Year End Gift to Wealthy Americans and Their Heirs

Posted: Updated:

No one expected the Obama administration to give wealthy Americans the ability to give away, tax free, up to $5 million in 2011 or 2012 to anyone including children, grandchildren or friends. Couples will be able to give away $5 million each or $10 million among as many members of their family as they like.

If this extraordinary measure did not exist, wealthy donors would have to pay a gift tax to the federal government and their state of residence for making any cash payment over $1 million, to their heirs.

If they take advantage of this opportunity, it means they avoid waiting to see if the $5 million exemption on estate taxes, just passed by Congress, remains in effect -- a quite serious risk, when you might have to pay a large percentage of 35-50% to Uncle Sam in the event the $5 million gift tax exemption is ever rolled back.

Gifting grandchildren $5 million in early 2011 removes $5 million from your estate and avoids the New York State estate tax of 12-13% after the first $1 million if you leave the $5 million in your estate.

By doing so, wealthy Americans avoid taking the risk that some time in the future this tax bill will be revoked and a more stringent limit of the amount subject to exemption from taxes along with a much more punitive levy on inherited wealth be passed.

As Schulte Roth & Zabel, a law firm that represents many wealthy individuals and families (including me) trumpets in their "Alert " of December 21, the new tax legislation significantly changes the federal estate, gift and generation-skipping transfer tax laws for 2010 through 2012 and provides taxpayers with valuable wealth transfer opportunities.

Skipping a generation means that assets will be protected for your grandchildren and won't be taxed in the estate of your children when they die. This ability to protect distant heirs has been a great advantage for wealthy families wishing to protect their capital and see it grow over several generations.

Indeed, trust and estate lawyers were not sure until the bill was passed that even the $5 million exemption for estates would remain, as many Democratic legislators were vehemently against raising the exemption from taxes to the $5 million level. The exemption for the remainder of 2010 is only $1 million.

Their surprise about the bill's success was underscored by the unexpected added ability for individuals with assets that have gained in value over the years, to gift them in 10 days to their heirs and grandchildren without paying a cent of taxes.

Says Judith E. Siegel-Baum, a partner of Cozen & O'Connor's Private Client Services Group in New York:

"This surprise part of the bill gives individuals with accumulated wealth the ability to pass on assets l that have risen in value to anyone -- but especially their children and grandchildren without incurring any gift tax that would reduce the value of he assets."

Schulte Roth & Zabel also underscore that wealthy Americans who wish to create generation-skipping trusts for grandchildren or more distant heirs, have a unique opportunity which may never be available again, to make gifts... in 2010 without incurring any GST tax." SRZ's memo urges wealthy individuals to hurry to establish these GST trusts before the close of 2010.

A similar ALERT from law firm Cozen O"Connor, also emphasizes that "Gifts made directly to grandchildren (either outright or in trust) in 2010 will not be taxed for GST tax purposes and will not require any use of GST exemption. Therefore, clients who have not used all of their existing gift exemption (still capped at $1,000,000 per donor for 2010) should consider making such gifts."