September 26, 2023

Wealth Matters: Wealthy Hesitate to Take a Break on Estate Taxes

But five months into the tax break, the people able to fully exploit it are more tentative than wealth advisers had expected. That could be a problem because this exemption, which will most likely be used to give money to children and grandchildren, is done through complicated structures that take up to a year to set up. (The exception, of course, is if someone simply dies. Then, the new estate tax exemptions of $5 million per person and a rate of 35 percent above that kick in.)

So why are the richest Americans hesitating to take advantage of this tax break? It comes down to two fears that bedevil everyone: they don’t want to put too much aside now in case they need it later, and they don’t want to take away their children’s incentive to work.

“Everyone is trying to capitalize on this two-year window because there is this ‘use it or lose it’ mentality and a need to plan wisely,” said Coventry Edwards-Pitt, senior wealth adviser at Ballentine Partners. “But the ideal answer from a tax mitigation standpoint is probably different from what most families can handle.”

While the changes to the estate tax might not produce a revenue windfall for the United States Treasury from people opting to pay the 35 percent gift tax, they could lead to a conversation that families at all levels of wealth rarely have: how do they want their lives, and by extension their wealth, to influence their children?

MONEY-MAKING OPPORTUNITIES By the end of 2010, many very wealthy couples had already given as much as $2 million in tax-free gifts, the previous limit. But the estimates of a gift of another $8 million, to hit the new $10 million limit, could be a windfall to heirs.

Lisa Featherngill, director of wealth planning at Wells Fargo Family Wealth, said an $8 million gift made to a “grantor dynasty trust” — a structure that allows the people making the gift to pay taxes on the capital gains during their lifetime — could grow to as much as $140 million over 40 years.

This potential growth is one of the reasons advisers say that few people are looking to exceed the exemption level. The other is that some feel the economy could weaken again and they might need their money.

Milo Zidek, who made his money in the reinsurance business, said he and his wife, both 76 and living in south Florida, would use the additional $8 million gift tax exemption to transfer money to their children and grandchildren.

“I doubt we’ll do more than that,” he said. “We’ve got to live. And you don’t want to overwhelm them.”

To that end, Mr. Zidek said, they would put the money in trust “because we don’t want them to become wild and crazy guys.” That, he said, was “improbable but nonetheless we want to keep their noses to the grindstone.”

DETERMINING STRATEGY Mr. Zidek’s concern is typical of what this window has prompted: will the rush to take advantage of a tax break turn heirs into trust-fund brats?

Advisers are counseling clients to spend significant time determining their intentions before they even think about the amount of the gift. “As a C.P.A., I can run through the numbers, but that doesn’t take into account the angst over the giving,” Ms. Featherngill said.

Once they have decided the family philosophy for their money, there is no shortage of ways to give far more than the $10 million a couple is now allowed to provide tax-free. Any private banker will reel off a list of obscurely named financial vehicles that will multiply the value of the gift.

Samuel V. Petrucci, director at Credit Suisse Private Bank, said he was working with an investment banker worth $75 million who was hesitant to put securities or cash into a trust for his children. Instead, he and his wife have decided to put a vacation home worth about $9 million into a trust that allows them to use the home until it passes on to their children.

“This client 100 percent understands why they should give $10 million,” Mr. Petrucci said. “To go from $75 million to $65 million doesn’t work for him. But in his mind, he is willing to part with the vacation home that he wants to keep in the family for a very long time.”

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