NEW YORK (Reuters) - With U.S. taxes almost guaranteed to rise next year, the rich have a rare opportunity to distribute some wealth and preserve their fortunes.
A weak economy has led to razor-thin interest rates and beaten-down valuations, which make giving less costly for and potentially more rewarding to heirs. Moreover, the U.S. government is widely expected to rein in a popular tax-avoidance scheme.
“This is a golden era for shifting estates and giving assets away,” said Bill Fleming, a financial planner for PricewaterhouseCoopers in Hartford, Connecticut. “If you have an estate plan, keep going: Uncle Sam soon will be back in your pocket.”
Much of the debate about taxes this year has centered on the estate tax, which disappeared this year for the first time since Teddy Roosevelt was president. Several different plans are under debate, but even if no agreement is reached, the tax is slated to return at a higher 55 percent rate next year.
Financial planners are encouraging clients to give away assets and pare down their estates through an array of tax-free gifts, intra-family loans and trusts.
“We know the estate tax is coming back, so you want to move assets out,” said Andrew Friedman, the former senior tax partner at Washington law firm Covington & Burling. “This is a good year to give away assets to children and grandchildren.”
Friedman says capital gains taxes are only going to rise, and top earners may pay nearly 40 percent of their income. Contrary to the usual advice, investors should record income and capital gains now, but defer charitable deductions until next year.
Taxes on generation-skipping transfers, another estate planning scheme, were also eliminated this year, but are likely to return next year at rates as high as 55 percent.
Meanwhile lawmakers are expected to rein in a popular tax-reduction scheme: the grantor-retained annuity trust, or GRAT. Under current rules, Americans can transfer assets they expect to rise in value into a GRAT and receive a stream of payments for a specified term, as little as two years.
Gains in those assets go to the trust’s beneficiaries tax-free.
Now Congress is looking to crack down on GRATs, making some distributions taxable and extending the minimum term to 10 years. That would make them less attractive for many estates.
Gift taxes, which fell 10 percentage points to 35 percent this year, also are set to bounce back to 55 percent next year. Americans can give up to $13,000 per person a year, up to $1 million over their lifetime, without paying taxes.
In some cases, the wealthy may want to give more than the minimum this year and pay the tax.
“I’m telling people if gifts make sense in a world with 45 percent estate tax, the 2009 rate, it makes all the more sense if you look to 2011,” said Steven Lavner, a senior vice president in U.S. Trust’s (BAC.N) national wealth strategies group.
That said, a lot of people are holding off on gifts until the end of this year, waiting to see what happens in Congress.
Carol Kroch, an estate planning expert at Wilmington Trust Corp WL.N, said the bank was advising clients to increase gifts and other wealth transfers.
Among the options are intra-family loans, whose rates are set by the government. Recently, estates could lend assets to heirs at the rate of 0.53 percent for three years.
Low interest rates also increase the benefits of such wealth transfer techniques as GRATs, charitable lead trusts, and assets sold into a trust.
“It’s just a perfect time to be transferring assets to the next generation, to perpetuate their wealth,” said Jeremiah “Jere” Doyle, a senior vice president at BNY Mellon Wealth Management (BK.N).
Reporting by Joseph A. Giannone; Editing by Lisa Von Ahn