Gifts in 2010 as a Strategy to Reduce Your Estate

Posted on October 12, 2010 by Gary A. Phillips & Steven M. Saraisky

One of the lesser known components of the 2010 estate tax repeal is that the gift tax rate in 2010 is 35%, as opposed to the 45% gift and estate tax rate that was in place in 2009. This presents a planning opportunity for a taxpayer to reduce his taxable estate and save a significant amount of taxes if the taxpayer believes that his estate will be subject to an estate tax in the future.

Absent new legislation, the 2010 estate tax repeal will sunset in 2011, with the estate tax reinstituted at rates as high as 55% and an exclusion amount equal to $1 million (adjusted for inflation). Gifts in excess of $1 million also will be subject to gift tax at rates as high as 55%. Thus, gifting assets in 2010 at a lower rate will ultimately transfer significantly more wealth to a taxpayer’s beneficiaries.

Assume that a taxpayer desires to gift $10 million to his children and has used his lifetime gift exclusion. In 2010, the gift tax on this gift, payable at a 35% rate, would be $3.5 million. Taxpayer would pay the gift tax so the total outlay for the taxpayer to get $10 million to his beneficiaries would be equal to $13.5 million. Assuming that the taxpayer survives three years from the date of the gift, the amount of the gift tax paid will not be included in taxpayer’s estate.

Now assume that the same taxpayer does not make the gift in 2010, and dies with $13.5 million in his estate in a year where the maximum estate tax rate is 55% (and said taxpayer also has used his full exclusion amount). The amount of estate tax due on the $13.5 million included in the taxpayer’s estate would be approximately $7.5 million, leaving approximately $6 million to pass to the taxpayer’s beneficiaries. On these facts, the 2010 gift of $10 million increases the net amount passing to taxpayer’s beneficiaries by almost $4 million.

The lower gift tax rate combined with the fact that the gift tax paid is not subject to estate tax (assuming taxpayer survives three years from the date of the gift) can produce dramatic savings for taxpayers inclined to make gifts in 2010 and pay gift tax.

Even more dramatic savings can be achieved in 2010 if the taxpayer’s beneficiaries are grandchildren. Due to the fact that the generation-skipping transfer (“GST”) tax is repealed in 2010, a gift in 2010 to grandchildren will not trigger a GST tax. If the same taxpayer dies in future years leaving these assets to grandchildren, the assets will be subject to both estate tax and a significant GST tax (up to 55%), further diminishing the amount ultimately passing to grandchildren.

There are less than three months remaining (assuming no retroactive application of new gift and estate tax laws) to implement this planning.

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Does a New Jersey Will Need To Be Signed?

Posted on October 6, 2010 by Steven M. Saraisky

Louise Macool, a resident of New Jersey, had a 1995 Will and a 2007 Codicil. She met with her attorney about preparing a new Will. She had written that, among other things, she wanted to add her niece as a beneficiary and keep the house in the family.

Macool’s attorney dictated the Will and his secretary typed a rough draft while his client was in the office. Unfortunately, however, Macool left the office and died one hour after the appointment.

The niece (who was an added beneficiary under the proposed new Will) brought an action to admit the draft Will to probate. The trial court found that the draft Will could not be admitted. New Jersey law requires a Will to be signed and acknowledged by two witnesses in order to be valid (NJSA 3B:3-2), and the document failed that test. New Jersey law also allows a non-compliant document to be admitted as a Will if the proponent can show by clear and convincing evidence that the document was intended to be a Will. NJSA 3B:3-3. The trial court found that, although it was proven that Macool intended to change her Will, there was insufficient evidence to conclude that Macool intended the actual draft document to be her Will. The trial court also held that a Will must be signed in some fashion in order for it to be admitted to probate.

In a September 16, 2010 opinion, the Appellate Division agreed with the trial court that the Will draft was inadmissible as a Will. The Appellate Division also rejected the part of the trial court’s ruling that a Will must bear the testator’s signature. Thus, it appears that in New Jersey, a document which is unsigned may still be admitted to probate as a decedent’s Will.

This case concerns an attempt to have a court accept a non-compliant document as a Will. Obviously, the best practice is to have properly executed documents. Perhaps the lesson is that Will formalities, difficult as they sometimes are, really do matter.

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