Estate of confusion over inheritance tax

Clock ticking down on $5 million exemption, but clients unsure what to do

Nov 4, 2012 @ 12:01 am

By Andrew Osterland

The deadline is fast ap-proaching for wealthy individuals who plan to take advantage of the $5 million estate and gift tax exemption.

The individual exemption for estates and/or gifts made during a person's lifetime is set to revert to $1 million Jan. 1 unless Congress acts. In addition, tax rates on estates over that threshold could rise to 55%, from 35%.

While there's no telling what, if any, compromise will be struck in Washington to avoid the automatic changes to tax policy, wealth managers say there could be a rush to take advantage of the current rules. And they suggest that individuals considering large gifts to relatives or others get the process started now.


“There's been a tendency for people to say, "Maybe Congress will extend this again.' We see a lot of people still sitting on the sidelines,” said Carol Kroch, head of wealth and financial planning at Wilmington Trust Co. “We're recommending clients not wait. If they want to make a large gift, they should get things under way now.”

Although the tax benefits of the current rules are clear and considerable, lawyers and wealth managers said they are surprised more wealthy clients haven't jumped to take advantage of the opportunity.

“We've had fewer clients do it than I expected,” said Charles Aulino, director of financial planning at The Glenmede Trust Co. NA.

The reluctance is understandable, given the enormous uncertainty in the political environment, said David Bokman, chief wealth advisory officer at GenSpring Family Offices LLC.

“Making a large gift this year likely makes sense from a tax perspective, but the decision to move forward with a major gift is extremely personal and involves many non-tax considerations,” Mr. Bokman said. “It would be a mistake to rush into making a large gift this year without carefully considering how it impacts your overall goals and objectives.”

First among those considerations: whether an individual or couple can afford it. For a retired married couple with at least $30 million in assets, a large gift either to children or others is “nearly a no-brainer,” Mr. Aulino said.

But the decision gets harder for people who have between $15 and $20 million — particularly given the current level of investment returns. “If they're spending in the range of 4% to 6% of their assets annually, it's understandable that they might worry about running out of money,” he said.

The other major concern is how a large gift of money — usually to children — could affect the recipients.

“There's a concern that if parents give $10 million to their kids, it will turn them into trust fund babies,” said Todd Angkatavanich, a lawyer specializing in trusts and estate issues at Withers Bergman LLP. “They want them to have a sense of stewardship and responsibility.”


The best way to address that concern is to establish a trust structure, Mr. Angkatavanich said. “For better or for worse, those assets are likely going to make their way down to the next generation. By creating a trust structure, people can control how and under what circumstances children can access the money.”

The incentives and restrictions that can be drafted into trust structures are almost limitless, allowing individuals to disperse money to beneficiaries over time and only under certain conditions. But such structures can't be set up overnight. If wealthy individuals want to take advantage of this possibly once-in-a-lifetime giving opportunity, they need to act soon.

“It takes time to get the process started,” Mr. Angkatavanich said. “If people want to create a well-crafted trust, they need to think about it now and speak to an adviser.” Twitter: @aoreport


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