U.S. rich get 2-year window on gifts to heirs

A shopper walks down Fifth Avenue holding Tiffany & Co shopping bags in New York October 8, 2009. U.S. retailers posted their first monthly sales increase in more than a year.

NEW YORK (Reuters) - America's wealthiest families have a rare chance to pass along millions of dollars to heirs, but they should not wait too long to take advantage, executives from Wilmington Trust Corp said.

Last month, President Barack Obama struck a deal on U.S. tax policy with Republican lawmakers that made extraordinary concessions, not the least of which was reducing the estate tax to 35 percent and raising exemptions to $5 million per spouse.

With two weeks to spare, the new tax plan replaced Bush Administration tax policies due to expire at the end of 2010.

Wilmington Trust, among the largest firms in estate planning, said generous gift and generation-skipping tax provisions give millionaires a rare chance to keep more of their stash away from the tax man.

Gift tax rates were chopped to 35 percent -- they were expected to reach 55 percent -- and the exemption was raised to $5 million per person from $1 million. Couples can pass on $10 million tax-free to their children.

"We've just received a beautiful, marvelous gift," Wilmington Trust Chief Client Officer Peter "Tony" Guernsey said at a news briefing in New York.

There is a catch, though: the new tax plan expires in 2012.

"We were given a two-year window of certainty and opportunity," Wilmington wealth and financial planning head Carol Kroch said at the briefing. "We tell clients giving is on sale, but only for 23 months."

Where the estate tax takes a cut of transfers after death, Uncle Sam levies gift taxes on transfers for the living. Under the Bush-era plan, these taxes had been falling in rate while the exemptions, the amount the rich could keep tax free, kept rising.

Obama, and then Congress, offered the rich an unexpected gift by keeping the rates low, the exemptions high and by leaving unchanged a number of other tax-reducing schemes.

Among the perks of the new policy is something called "portability." That means the unused estate tax exemption of a deceased spouse can be used by the surviving spouse for gift tax purposes -- for now, through 2012

But portability can be complicated by families with divorces and remarriage, Kroch cautioned.

Investors can further preserve their wealth by using gifts

to start or bolster Delaware dynasty trusts, tax shelters that essentially last forever.

Another option, she said, is funding a Delaware asset protection trust, which lets grantors have some access to their funds. Trusts, aside from protecting assets from the tax man, can build on their initial gifts by making purchases and investments.

"It's like creating an endowment," Kroch added.

(Reporting by Joseph A. Giannone; editing by Andre Grenon)