Nov 20 Tax bills on big gifts are set to
increase substantially at year's end, and that means the timing
couldn't be better to pass on a gift. Th e challenge now? Time.
With just six weeks left until the end of 2012, developing a
flexible and legally solid estate plan needs to be done quickly.
Americans have been able to gift up to $5.12 million tax
free this year, up slightly from 2011. At year's end, that
lifetime gift-tax exemption will be slashed to $1 million.
What's more, tax rates on gifts above the exemption level are
set to shoot to as high as 55 percent from a current rate of 35
Congress may act to soften the blow , but estate planning
experts say the current tax situation presents the opportunity
of a lifetime for giving. However, financial advisers say many
clients waited too long and are now scrambling to plan a gift -
at a time when estate planners say they have never been busier.
"It's been a wave that continues to peak," said David Levi,
senior managing director and estate planner at CBIZ MHM, a
nationwide business management consulting firm.
While it is probably too late to set up a complicated giving
strategy such as a multi-generational legacy plan funded by
illiquid assets, there are trusts that can be set up quickly -
an option that gives clients more control than just writing
their heirs a check.
MATTER OF TRUSTS
Trusts are go-to giving vehicles because benefactors can set
rules on when and how heirs can access the money. Plus, the gift
is protected from creditors in the event of an heir's own
A basic irrevocable trust will capture those benefits and
can still be set up before the end of the year. However, there
are other advanced trusts that are worth considering, also with
time left in the year to set up.
One is an intentionally defective grantor trust. This works
like a typical trust, but the tax bill on any income earned on
the principal is the responsibility of the benefactor.
Why would a gift-giver want the tax bill? It's a way to give
an additional gift to heirs, particularly if the benefactor has
maxed out the $5 million limit. Paying the taxes for the
recipient increases the gift's bang for the buck, said Steve
Wittenberg, director of legacy planning in the private wealth
management division of SEI, an Oaks, Pennsylvania-based
financial services firm.
There is also a boilerplate clause in this type of trust
that could be crucial for people who want to give an illiquid
asset, like a piece of real estate, to the trust, but cannot get
an appraisal before Dec. 31. The "right of substitution" clause
allows the benefactor to put cash in the trust as a placeholder
and later replace it with the other asset after it has been
Also, consider a spousal access trust. This allows someone
to make their partner the beneficiary and gives other heirs
access to the money after the spouse has died. Tread carefully
here however, because these trusts can be fraught with legal
issues, particularly if there is a divorce.
The timing is also good to set up charitable trusts for
clients who intend to leave large parts of their estates to
charity. It is important for a client to spell out their
charitable intentions so if they die unexpectedly, the money
goes to the charity before it gets taxed with the estate. Estate
taxes are also set to rise next year.
These trusts are all irrevocable, so advisers should be wary
of clients rushing to make a gift they can't really afford.
Another danger is that they will cobble together a strategy that
could leave the gift unprotected from creditors or open to
scrutiny by the IRS.
New York-based Bernstein Wealth Management projects clients'
spending over a lifetime and runs the numbers through 10,000
hypothetical scenarios, which vary based on inflation, rates of
return and market conditions.
Those simulations are used to find the core capital a client
will need to maintain their lifestyle for as long as they live
without running out of money. Surplus beyond that is the only
amount the firm recommends for gifting, said Dan Eagan, head of
For ultra-wealthy clients who will easily hit the $5 million
exemption mark, giving more money could be done by simply
writing a check, Eagan said. That's because they may just want
to capture the 35 percent tax rate on gifts above the exemption
level, before it jumps to up to 55 percent at the end of the
Advisers should also keep 2012 in perspective , said Robert
Glovsky, vice-chair with The Colony Group, a Boston-based wealth
management firm. If a client misses this opportunity to gift,
the worst that will happen is their heirs take a tax hit on
their inheritance. That's not ideal, but it is better than
making a hasty decision, he said.
"As good as the tax savings may be, always look at the
personal first," Glovsky said.