2-Year Estate Tax Window Slows Big Gifts

May 20, 2011

By Linda Koco
Contributing Editor, InsuranceNewsNet

May 20, 2011 --
The new $5 million gift tax exemption has triggered a lot of interest in nudging the ultra-wealthy to make large gifts between now and the end of 2012. That’s when the high lifetime exemption limit will end.

But not all wealthy people want to make big gifts, says John O’Grady, a partner in O’Grady Law Group, San Francisco, Calif. “Some just don’t want to part with their cash.”

The topic is gaining currency due to the Tax relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The law exempts from taxes gifts up to $5 million per person ($10 million per couple)—the same limits that now apply to estate tax exemptions, but only for 2011 and 2012. After 2012, the lifetime exemption drops to $1 million per person ($2 million for couples), unless Congress changes the law again.

Advisors are talking with clients about taking advantage of the two-year period, but wealthy people have different views about gifting, O’Grady says.
Some hear about the two-year period and get with it right away, he says.

“But others just don’t want to make big gifts, even when if the gift is exempt from taxes. In fact, some want more money. Still others drag their feet. Some will say they are too busy right now. They will say ‘next month.’ Some say ‘next month’ endlessly.”

In some cases, couples are concerned that a large gift might do more harm than good to the recipient, he adds. For example, parents may want to gift to a child via a large life insurance policy, but they hold back out of fear that the death benefit might reduce the child’s motivation to pursue a degree or build a career. (In such cases, O’Grady says he typically suggests setting up a trust that prohibits access to the funds until the child reaches a certain age or achieves specified goals.).

The chance of getting wealthy clients to move on making such gifts this year are slim, O’Grady predicts. That is so even when the reason for making the gifts is very strong and in the client’s best interests. “It’s tough to get them to focus on it now, let alone to make the gift.”
However, the situation may change as 2012 comes to a close. O’Grady adds.

“Clients may come to see that the $5 million lifetime exemption could be a once in a lifetime opportunity--a way to lock in high-exemption gifts without worrying about what Congress may do with the tax law after 2012.”

His advice to life insurance advisors who are talking with clients about gifting strategies during this two-year period is to “keep in mind that making big gifts is a long-term proposition for clients,” as is estate planning.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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