| PERSONAL FINANCE |
Federal Gift-Tax Exemption Set to Expire Soon Time is running out for wealthy individuals to take advantage of this unique opportunity.
High net worth families have been given an unprecedented opportunity to transfer large amounts of assets to loved ones tax-free. The federal gift tax exemption is currently at its highest in history - $5.12 million per donor ($10.24 million for married U.S. citizens). The catch is the exemption is set to expire on December 31, and revert back to $1 million per donor in 2013.
While many wealthy individuals could benefit from taking advantage of the exemption, time is running out for those who are indecisive or wait too long. The decision for a couple to make a $10.24 million gift (or potentially larger if more sophisticated gifting strategies are employed) is not a simple one.
First, they must look at their lifestyle needs to ensure that making the gift will not make them cash poor, or impair their ability to achieve personal goals, such as retiring at a certain date, or purchasing a second home. Second, they'll need to determine which assets to transfer. The nature of an asset, whether it is an interest in a business, a personal residence, or an encumbered asset, can affect the level of administrative complexity required to make the transfer. Moreover, in order to set a value for the gift that the IRS will more readily accept, valuation from a qualified appraiser may be required. Lastly, it's important to consider how your loved ones are going to receive the gift. Some people are comfortable with making gifts outright, but others may want a more measured approach to how much access over the gift the donees, usually children, will have. This may take into account the age of the child, financial maturity, or the donors may want to employ means to retain control over the asset themselves (such as gifting a minority interest and retaining managing control).
With all of the professionals on your advisory team, including an estate planning attorney, certified public accountant, certified appraiser, banker, and wealth planner, you'll need to also consider the likelihood they may be unavailable in the last quarter of the year as wealthy families scramble to get it all done in time.
Serious consideration should be given to how you transfer wealth, especially to children. Poor preparation can result in immature investment choices, overspending, lack of ambition or self-worth. It is easy for wealthy heirs to not value money they didn't earn, become isolated from the rest of the working world, or worse yet, feel the wealth defines them and they cannot achieve anything greater than what their parents accomplished.
Some donors tackle this issue by placing incentive provisions in the trust for their loved ones. Behaviors that reflect the donor's values, such as completing college, starting a business, purchasing a home or getting married are encouraged with lump sum payouts. Other donors provide that the trust act as a family bank – giving out low-interest loans that must be repaid for ventures that are backed up with an approved business plan.
Alternatively, other families address such concerns through family meetings. At a family meeting, the family's assets, gifting plans and the senior generation's expectations regarding how the gift will be used is discussed. Such family meetings are helpful to define the family's values, especially when gifts are being made across multiple generations, such as from grandfather to grandchildren. Determining how much information to convey to the junior generation can be decided and facilitated through the help of your wealth planner, or with a family dynamics professional.
Studies show more than 90 percent of a family's wealth will disappear by the third generation, which underscores the need to carefully consider these issues before taking advantage of the exemption. If you haven't yet decided how you'll take advantage of the increase in gifting, your Private Bank Relationship Manager can help you navigate the issues, come to decisions that are right for you, and most importantly – get them implemented.
Wells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries.
Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.