For much of 2010, lawyers advised wealthy clients to take advantage of a unique “opportunity” to make taxable gifts. With both the gift tax and the estate tax automatically scheduled to increase to 55% in 2011, the 35% gift-tax rate on gifts of more than $1 million last year looked like a bargain. Now, estate planners are in the awkward position of trying to figure out what clients who followed their advice can do to reverse those transfers.
Their collective chagrin stems from the sweeping tax overhaul President Obama signed Dec. 17. Under this law the amount that anyone can transfer tax-free during life went up this year from $1 million to $5 million ($10 million for married couples). So by simply waiting until 2011 to make gifts, it might have been possible to avoid gift tax altogether. What’s more, under the new law the tax on transfers that exceed the limit stayed at 35%, instead of going up to 55%, so paying tax in 2010 wasn’t a good deal for this reason either.
What’s the remedy for donors’ remorse?
There’s a dearth of viable options for clients who would like to undo taxable gifts made in 2010. They can disclaim the gift (if it’s not too late for that); make the case for rescission (in this context the legal theory rests on a frail reed), or seek a private letter ruling from the Internal Revenue Service asking for mercy (a costly process). Without clarification or leniency from the Service, clients may instead opt for legal self-help. What does that mean in this context? It might well be a euphemism for tax fraud.
Source: Steve Leimberg’s Estate Planning Email Newsletter. For more information about this, also look at a Forbes.com article.