Do they give their heirs the full amount of the exemption, happy that the money will help the heirs now and reduce their eventual estate tax bill? Or do they give less, or none at all, for fear that they could be left with not enough to live on?
“I’ve gone through this with lots of people, and based on the reactions, no one whose net worth is in the nine figures has worried about having enough,” said Edward F. Koren, chairman of private wealth services at the Holland & Knight law firm. “Below that, it depends on their spending levels and their values. That’s so personal to the client.”
The deadline for making a decision is fast approaching because advisers say it takes at least three months to do everything that needs to be done to set up a gift of this size.
All advisers agree that every financial decision is about more than saving on taxes. But in this instance, the math on both taxes and compound interest is compelling, particularly for younger people with wealth who have decades to live.
While none of the advisers would make a prediction on what might happen, no one thought the exemption would remain this high or the tax this low in 2013. After years of a $1 million gift exemption, the advisers agreed that this was a once-in-a-lifetime opportunity.
Adding to the benefit of the large tax exemption is the amount the gifted money can grow. For a child who received $5 million today in a trust that was invested broadly, that gift could grow in 30 years to nearly $29 million, at a 6 percent return every year, according to calculations by Jonathan Blattmachr, a principal of Eagle River Advisors, which consults on estate planning. Meanwhile, the parents’ estate would have been reduced by $29 million, cutting the tax due on the estate.
And that is why some wealthy people — those who could run out of money in their lifetime — have been seduced by this opportunity but are, at the same time, trying to work out how to do it. (The exemption for the estate tax is also $5.12 million until the end of the year, but, obviously, only those who die in 2012 can take advantage of it.)
Some people are also questioning the effect such a large gift will have on their heirs. Their main concern is that it will it rob their children of motivation, said Catherine McDermott, senior wealth planning strategist for Wells Fargo Private Bank.
But she said that fear may be misplaced. “A lot of the education around stewardship of wealth occurs during a lifetime as you’re raising children,” she said. “Many of those questions parents face as they’re raising children.”
In other words, by the time you have made enough money to think about leaving a lot of it to your heirs, you have either set them on the right path in life or led them to believe that your money will be their cushion.
For those who do decide to make a substantial gift, there are many different ways to do it. Writing a check is the simplest way, but advisers would tell you that would leave the money unprotected against creditors. It would also waste an opportunity to use various strategies to multiply the gift.
Putting appreciated securities in a trust would seem to be a good idea, but that could lock up liquid assets that might be needed.
Another option for people worried about having enough liquid assets is to put real estate or a share in a private business into a trust.
“Transferring a home doesn’t feel the same as transferring $5 million in stocks or bonds,” said Diane E. Lederman, president and chief executive of the Neuberger Berman Trust Company.
She cautioned that anyone doing this should make sure that all the paperwork was perfect because the people making the gift would essentially be renting their home back from a trust in their heirs’ names. “When you’re giving an asset away and you’re continuing to reside there, it’s going to attract I.R.S. scrutiny,” she said.