Jan 14 An unexpected tax break for the
wealthiest Americans has some of them wondering if they were too
generous during the final weeks of 2012.
Last year Americans were able to gift up to $5.12 million
tax free to family and friends over a lifetime as part of their
estate, an amount separate from the tax-free amount anyone could
annually give per person, $13,000 last year.
Most tax advisers and their wealthy clients expected the
$5.12 million to drop to $3.5 million or even lower on Jan. 1 -
leading to a scramble among the wealthy to make big gifts before
the end of 2012.
But, in a surprise to estate planners and lawyers, who
scrambled to help clients give money, property and business
interests before the clock struck midnight on Dec. 31, the
"fiscal cliff" deal, hammered out by the U.S. Congress at year
end, retained the $5.12 million exemption level, even tossing in
an extra bump to account for inflation.
That made the new year a bit bittersweet, leaving some
people with what financial and tax advisers call a case of
"gifting remorse." Some wealthy clients have told their advisers
they felt they had rushed into giving too much or too soon,
decisions made under the then very real threat of leaving heirs
with a heavy tax burden down the road.
Clients who want to undo their gifts are probably out of
luck, several tax experts said, because in order for them to get
the tax benefit in the first place, the gift had to be
irrevocable. But for them, advisers say, there's still a solid
silver lining - getting estate planning out of the way.
"After they get over the shock ... it was something they
should have done regardless," said Leigh Griffith, head of the
tax practice group at the Nashville, Tennessee-based law firm
Among the perks for having made a gift last year: the money
is better positioned for heirs, and if it is in a trust, it is
protected from creditors and could still potentially be
indirectly accessed by the benefactor. And the grantor may have
even found a good way to test their heirs' ability to handle a
windfall - allowing time to adjust future decisions about
whether to give more.
THE BRIGHT SIDE
Mary Schmidt, a Boston-based trust and estates lawyer, was
mingling at a New Year's Eve party when she found herself
comforting a friend who was second-guessing a decision to give
away $5 million.
The friend regretted his rush to gift the sum to his
children, questioning whether it was necessary. She talked the
man down - something more than a few advisers may be doing these
days - explaining how the gift would benefit his estate.
The biggest benefit: the wealthy and the gift recipients get
more bang for their buck by giving early. Say the client gave
50,000 shares of stock worth $5 million. If the client had
waited a few years, and the stock appreciated, he or she
wouldn't have been able to gift as many shares, leading to a
bigger tax bill later.
A few other benefits:
- Most people made their gifts via trusts, where the assets
are better protected from creditors. So if, say, the giver gets
into legal trouble, the gift can't get tied up in a lawsuit.
- Clauses in some trusts give the benefactor some control
over the money. For instance, many people took advantage of
spousal access trusts, meaning their spouse is a beneficiary of
the gift along with other heirs. As long as they remain married
and the spouse is alive, the benefactor can indirectly access
the money via the funds that flow to their spouse.
- Many trusts also come standard with a "right of
substitution clause," so that if a person regrets giving a
particular asset, they can replace it with something else of
That clause may come in handy for Rob Romanoff, managing
partner at the Chicago-based law firm Levenfeld Pearlstein, who
has a client who wants to undo the $5 million gift he made to
his wife and children after the exemption level stayed the same.
Romanoff quickly discovered that the client didn't regret
the bulk of the gift, given through a spousal access trust, but
instead wanted to regain control of a $75,000 stake in a tech
start-up he expects to take off. If the man continues to feel
this way, Romanoff will help him take out that stake and replace
it with $75,000 in cash or another equivalent asset.
The gifts may also provide benefactors with a glimpse of how
well their heirs may one day handle a windfall.
Griffith, the lawyer, worked with a couple last year who
were initially reluctant to give several million dollars to
their grandchildren, who had never handled such a large sum.
The couple eventually did so, with a twist that could teach
the grandchildren some investing lessons. They set up a trust
that encourages the grandkids, who are in their late 20s and
early 30s, to provide investing recommendations to the trustees.
The couple has been getting calls from their grandchildren,
asking them for investing advice ever since.
If nothing else, giving in 2012 helped clients focus on the
fact that they got this planning out of the way.
"It's nice to have the luxury of the bulk of the planning in
place, and now, going forward, to improve upon it," said
Jennifer Immel, senior wealth planner at Philadelphia-based PNC