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New Gift-Tax Exemption Lets Families Give Away More


The new tax law's $5 million gift-tax exemption for 2011 and 2012 gives high-net-worth individuals a short-lived opportunity to give more money to family members tax-free.

The new tax law’s $5 million gift-tax exemption gives high-net-worth individuals a unique opportunity to give more money to family members tax-free, says Jonathan Bergman, vice president at Palisades Hudson Financial Group, a financial advisor in Scarsdale, N.Y.

The new $5 million exemption replaced the $1 million per-person gift-tax limit as of Jan. 1.

“We’re working on several gift plans already and expect to be coordinating major gifts throughout this year,” he says. “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.”

Consider a couple worth $20 million, Bergman says. Each spouse could give away $5 million to each of their children and/or grandchildren, and not pay a penny of federal gift tax or generation-skipping tax, which applies to gifts to grandkids.

Suppose both spouses die 15 years from now, and their remaining $10 million has grown to $30 million. The total will 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 would have grown to $60 million, with $50 million subject to the estate tax if the law hasn’t changed.

“You’ve entered an unfavorable partnership with the government,” Bergman says. Providing opportunities while you’re alive is as important as saving taxes, he adds.

“The ‘kids’ who inherit large estates are often in their mid-60s, and the money often doesn’t make a big difference in their lives,” Bergman says. “Now, you can give your children more money at more impactful time, when they might have kids in college and can use it. If your children don’t need the money, you can give it to grandchildren or nieces and nephews.”

Bergman’s wealthy clients typically set up an irrevocable trust. The trustee can keep the funds in trust for years, disbursing only what is necessary or helpful. “It’s wiser than forcing a lot of money on a young person who is not prepared to handle it,” he says.

Normally, the trust pays income taxes on its earnings. But there’s another angle: With a “defective” grantor trust, the gift giver, or grantor, still pays income taxes, effectively removing more money from the estate and reducing future estate taxes.

There’s some urgency to give to your family over the next two years, because the gift- and estate-tax exemption is scheduled to revert to $1 million in 2013. Bergman thinks it’s likely Congress will make the $5 million exemption permanent by then, but cautions no one should count on it. The possibility that there will a $1 million estate-tax exemption, plus a higher tax rate, two years from now makes it even more compelling for the wealthy to give money to their family now, he adds.

Jonathan Bergman is a CFP and Enrolled Agent. Palisades Hudson is a fee-only financial planning firm and investment advisor headquartered in Scarsdale, N.Y., with $1 billion under management. It offers estate planning, insurance consulting, trust planning, cross-border planning, business valuation and appraisal, family office and business management, and executive financial planning. Branch offices are in Atlanta and Fort Lauderdale, Fla.

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