Generation Skipping Transfer Tax Is Gone Too (for Now) But the Gift Tax Lives On

As part of the one-year repeal of the federal estate tax, the generation skipping transfer tax (GSTT) was also repealed for 2010.

The GSST is a super-confiscatory extra tax that is added on top of the "regular" gift or estate tax bill when generation-skipping transfers in excess of the exemption amount are made.

Generation-skipping transfers are those made via gifts while alive or as part of bequests after death to individuals who are deemed to be two or more generations below the giver. For 2009, the GSTT exemption was a relatively generous $3.5 million, and the maximum tax rate was 45 percent. Next year, the GSTT is scheduled to come roaring back with an exemption of only $1 million, and the maximum tax rate is scheduled to go up to 55 percent.

Observation: Although the GSTT is currently repealed, Congress will probably resurrect it (along with the federal estate tax) sometime in 2010, and lawmakers may try to make both taxes retroactive to January 1, 2010.

Gift Tax Status

Despite the repeal of the estate tax and the generation skipping transfer tax, the familiar $1 million lifetime gift tax exemption remains in place for 2010. However, the maximum gift tax rate drops to 35 percent this year (versus 45 percent for last year).

What's ahead? The maximum gift tax rate is scheduled to increase to 55 percent in 2011.

Roth Conversion Opportunity Is Finally Here

Regardless of your income, you can now convert a traditional IRA to a Roth IRA.Before January 1, 2010, only taxpayers with modified adjusted gross incomes of $100,000 or less could convert to Roth accounts. But the income limitations are now lifted, allowing everyone to reap the benefits of a Roth.

Unlike withdrawals from traditional IRAs, qualifying Roth withdrawals are free of federal income taxes and usually state income taxes too.

In addition to being good tax saving tools for retirement, Roth IRAs can also provide tremendous estate planning advantages.

Reason: Roth accounts do not involve required minimum distributions. You can leave an account balance untouched and accumulate as many tax-free dollars as possible to pass along to your heirs.

Converting does trigger a tax bill. The decision on whether or not a conversion is right for you involves several factors. Consult with your tax adviser for more information.