GST Tax Loophole in the Tax Deal

The tax bill passed by Congress confirms a 0% GST tax rate for 2010 and creates an additional loophole that was unavailable when I blogged about a possible payday for trust babies.

In addition to outright gifts qualifying for the 0% rate, money put in a trust in 2010 for the grandkids also qualifies for the 0% rate. This means that money can be declared subject to the 2010 GST tax, “prepaid” at a 0% rate, and deposited in a new trust for the grandkids’ benefit.  

Because this transfer would still be subject to the gift tax, this technique is even more beneficial if money is already in a “non-exempt” multigenerational trust and is transferred into a new trust. This money has already been subjected to the first layer of gift or estate tax, so no additional taxes would be owed.

Not all non-exempt multigenerational trusts can cash in on this GST tax loophole. For example, the trustee must have a lot of discretion for it to work. Additionally, only 11 states (Alaska, Arizona, Delaware, Florida, Indiana, Nevada, New Hampshire, New York, North Carolina, South Dakota, and Tennessee) have decanting provisions, allowing trust property to be moved to another trust for the benefit of a beneficiary. However, out of state trusts can take advantage of Alaska’s decanting law.

Estate planning attorney Jonathan Blattmachr stated, “If you do not give your clients an opportunity to do this, they’re going to be furious with you.”

For more information about this technique, see Janet Novack, Tax Deal Trust Fund Loophole Could Save Billions for Rich, Forbes, Dec. 16, 2010.