The new tax law’s $5 million gift-tax exemption went into effect on Jan. 1, replacing the $1 million per person limit. Although most observers believe Congress will make the new exemption permanent, it’s currently scheduled to revert to $1 million in 2013.

The possibility that there will a $1 million estate-tax exemption, plus a higher tax rate, in two years makes a compelling case for the wealthy to give money to their family now.

The wealthy often worry that giving too much too soon will make their beneficiaries less motivated to succeed on their own. Candid conversation—and careful planning—can clarify family issues. These latest wrinkles in the estate law provide planners both an opportunity and duty to raise the question.  

“We’re working on several gift plans already and expect to be coordinating major gifts throughout this year,” says Jonathan Bergman, of Palisades Hudson Financial Group, in Scarsdale, New York. “This opportunity lets wealthy clients part with money they won’t ever need, get the future appreciation out of their estate, and help family members now instead of later.”

Bergman offers the example of a couple worth $20 million: Let’s say each spouse gives $5 million to their children or grandchildren, and the remaining $10 million has grown to $30 million when both die in fifteen years. The $30 million will all be subject to estate tax because they used up their lifetime exemption under the unified gift and estate-tax law. But without the gift, their $20 million estate might have grown to $60 million. Assuming the same laws, $50 million would be subject to the estate tax.  
Bergman advises clients that providing opportunities while you’re alive can be as important as saving taxes. When children inherit large estates in their mid-60s, it may be too late to make a big difference in their lives.  “If the children don’t need the money now, your client can give it to grandchildren or nieces and nephews,” Bergman says.
If the recipient is young, clients might choose to put the gift into an irrevocable trust. disbursing money as needed.  Normally, the trust pays income taxes on its earnings.  With a “defective” grantor trust, the gifter pays income taxes, which cuts the estate and future estate taxes.
Inheritances are emotion-laden, another reason to set up a trust and give while you’ll still alive. Kathleen Gurney, a psychologist specializing in money management, tells the story of a writer in Cincinnati who received a large lump sum when her father died and burned through 75 percent of the money with bad investments. People think, “Why should I have this money when I lost a parent?,” Gurney says. “You think it’s not appropriate. If you can’t deal with the guilt feelings, you’re often going to use the money against yourself rather than to serve yourself.”

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access