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To give or not to give, up to $5.12 mn

Paul Sullivan/ 25 Nov 12 | 12:59 AM

Time may — or may not — be running out for one of the biggest tax breaks for wealthy Americans: The chance to give up to $5.12 million to heirs tax-free and then pay a comparatively low 35 percent rate on any gift above that. The break is set to expire next month, but no one will hazard a guess about its fate because it is just one of many tax and spending measures expiring at the same time.

When this break was agreed upon by President Obama and the Republican Congress at the end of 2010, I expected it would spur the wealthiest to give away huge amounts of their estate to take advantage of the break. (The original $5 million limit was increased this year for inflation; it is separate from the $13,000 annual exclusion gift.) But the rush that I expected was initially just a trickle. While the tax break was enticing, the fear of what lay ahead in the economy and financial markets made people cautious.

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Now, some of the wealthy are faced with a choice that seems designed by a behavioral economist to test rational decision-making: 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 on 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."

Some people are also questioning the effect such a large gift will have on their heirs. Their concern is that it will it rob their children of motivation, said Catherine McDermott, senior wealth planning strategist for Wells Fargo Private Bank.

She said the fear may be misplaced. “A lot of the education round stewardship of wealth occurs during a lifetime as you’re raising children," she said. So, by the time you have made enough money to think on leaving a lot of it to 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 gift, there are many different ways to do it. Writing a check is the simplest, 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 a good idea, but that could lock liquid assets. An option for people worried on having enough liquid assets is to put real estate or a share in a private business into a trust.


©2012 The New York Times News Service

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