December 23, 2012
The federal government's hunt for new tax dollars has thrown a twist into this season of gift giving and philanthropy.
It's not unusual for people to give money or appreciated assets like stock to charity this time of year so they can reduce their annual taxes. But this year, there's a greater sense of urgency among the wealthy and especially those with multimillion-dollar estates to unload some of their wealth.
The push comes because estate taxes — or those paid after a person dies — are expected to shoot up considerably next year.
Now, estates of $5.12 million per individual are exempt from the tax, or $10.24 million for a couple. But at the end of this year that's supposed to change automatically unless Congress intervenes. Next year only $1 million will be exempt for individuals, or $2 million for couples. The changes restrict the gifts people can give away to lessen the value of their estates, and the taxes will be as high as 55 percent.
So people have been busy moving wealth out of their estates — giving money and other assets to children, grandchildren and charitable organizations before year-end. Estate planning attorneys have been inundated by people interested in setting up trusts that can shelter assets for future generations.
"People are concerned that this could be the end of the opportunity to shelter $5.12 million per person," said Steven Weinstein, president of Altair Advisers.
Still it's a tricky time. The very wealthy have numerous avenues available to them through trusts and other strategies. But the less wealthy have been laboring over the decisions, said Julie Krieger, partner of Evercore Wealth Management. Their issue: If they set up trusts that limit their estates too heavily, they may find later that they want or need more money than they assumed, and could regret the structure they established, even though some trusts provide leeway for accessing money.
One couple recently decided not to set up a trust because they decided that given their emotional makeup, they would "try to just live on $10 million" and they would feel restrained as they made decisions, said Krieger. Others ask "are they comfortable giving a certain amount of money to the kids, or are they afraid the children will be disincentivized to build their own lives?" she said.
Meanwhile, the new tax structure is a moving target. While the estate exemption is set to go to $1 million next year, Congress could intervene as Washington makes numerous shifts in the nation's tax system. President Barack Obama has indicated in the past that an exemption of about $3 million could be acceptable. If the nation embarks on major tax reform in 2013, many deductions and rules could change.
Regardless, this is the time of year when people in the mood to be charitable can also harness a tax deduction for the year. People worried that charitable deductions might be ratcheted back for people with incomes over $250,000 next year are being encouraged by some advisers to give large donations this year because they can be certain that they will get the full deduction in 2012. Then, money stashed away in a donor fund can be used next year, and in the future, to give grants to charitable organizations. They won't get tax advantages then for deploying the money, but they will be able to fulfill their charitable objectives with a tax deduction on the large sum this year.
One way to do that quickly for families that haven't decided what causes to support, would be to give a large amount of money or assets such as stock or mutual funds to a donor fund operated by a firm such as Fidelity, Schwab, T. Rowe Price or Vanguard. Once a person deposits assets in one of these funds, they are eligible to deduct the full amount that year even if the money has not been given to charitable organizations yet. Then, as time goes on, the person can direct the fund to make grants — sometimes as little as $50 to qualified charitable causes.
To get started with one of these funds, Fidelity and Schwab require an initial $5,000 contribution. Vanguard's minimum is $25,000.
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