Wealthy grandparents have a unique opportunity this year to give their grandchildren gifts of substantial value without incurring any generation skipping transfer tax. This is a huge savings opportunity!—so why aren’t more people taking advantage of it?

Part of the reason may be lack of awareness. Everyone knows about the Bush administration’s year-long repeal of the estate tax, but very few people seem to be aware that the Bush tax cuts included a year-long lapse of the generation-skipping transfer (GST) tax as well.  The GST was an additional tax on top of the estate or gift tax.   In effect, it operated as a second transfer tax imposed on transfers which “skipped” generations.  According to this article in Reuters, last year (2009) “generous grandparents could give away $3.5 million without paying the [GST] tax”. During 2010, they can give away even more. . . . assuming that Congress does not reinstate the GST retroactively.

But before you call the grandkids with the good news, consider whether or not you feel comfortable giving them such a large sum outright.  If your grandkids are still young (and not yet responsible about money and finances) you may not want them having such a large sum to play with; and unfortunately, giving the gift in trust is not an option in this case.  “To take full advantage of the GST tax break, assets should be transferred directly to beneficiaries and not to a trust. Money placed into a trust may lead to taxes when distributions are made later on.”

If your grandchildren are responsible adults, and if you’ve been considering giving them a monetary gift anyway, this lapse in the generation-skipping transfer tax could be just the push you need.  Although there is still a basic gift tax for lifetime gifts in excess of $1 million, the tax on the excess in 2010 is only 35%–much less than the scheduled leap to 55% come January 1, 2011.  This, in conjunction with the one-year GST tax lapse (which would otherwise add a second layer of tax to any gift to grandkids) makes 2010 a great year to give gifts to your grandchildren.  Talk to your attorney or financial advisor about your gift-giving options.