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Gifting in 2010 – A Potential $13,462 Trap!

We’re already in the fourth quarter of 2010. For me that means gift planning time!

I know, I know, all tax and financial planning professionals already know the drill. Donors can make their $13,000 annual exclusion gifts, and additionally can even gift up to an aggregate amount of $1,000,000 during their lifetimes through the exemption amount of the unified credit. Simple, right? It may not be as simple as you think, at least in 2010, the year that all things strange come out to haunt in the realm of transfer tax law.

While most planners are aware that the gift tax rate has been reduced to 35% in 2010 and that the largest possible exemption equivalent of the unified credit remains at $1,000,000, many do not understand that the unified credit amount may effectively decrease from $345,800 to $330,800. This potential decrease in the unified credit amount may occur because gift tax rates on gifts over $500,000 exceeded 35% for periods prior to 2010.

Because of this change, any taxpayer who has made gifts prior to 2010 of more than $500,000 but less than $1,000,000, may find that some of their unified credit has been lost due to the change in rates. For such individuals, the exemption equivalent may now be as low as $961,538, producing a potential additional gift tax of up to $13,462 for the unwary. With all that said, the issue may not yet be on the “radar” of the IRS, so we are not really sure if our interpretation will be applied or if the Service might provide some relief for this possible trap.

Remember, there is a difference between the “unified credit” and the “exemption equivalent of the unified credit amount.” The devil is surely in the details, so stay tuned. Happy Halloween!

- Attorney David M. Grant