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Life Stage Investing: 'Shrinking' Estate Taxes |
"You don't want to butt heads with someone's psychology," says Amy Holzman, JD, of New York-based law firm of Guzov Ofsink, adding that some of her clients "feel poor but are rich."
"I'm almost like a psychologist these days," says the already professionally accredited Ana Cela Harris, JD, CFP, who has more than 20 years of experience, not as a shrink, but as an estate-tax planning and corporate attorney.
Harris, like many of her estate-planning peers, sees her fair share of high net-worth family dramas. "I don't take a side; I listen to everyone. I deal with clients' emotions - like fear and control - issues that can end up deferring the decisions to gift assets," explains Harris, a partner and advisor with Singer Xenos, which is an independent, fee-based wealth management firm with offices in Florida.
The emotional side of planning can not be ignored, planners agreed. Perhaps that's because no other topics illicit similar levels of emotional responses than death and taxes -- especially planning of each with potential survivors who may have their own "issues." However, giving away assets before death can provide an emotional boost for the donor. Harris explains that recipients "get a chance to say thanks" to the donor. Inheritance, as she points out, does not allow for that opportunity.
Inheriting even a piece of an estate can also trigger the federal estate tax with rates in excess of 40% during the last four years, if the clients can't dwindle down their taxable estate by the time they pass on. So, for most clients, an estate plan that includes a gifting strategy can typically reduce, leverage, or eliminate estate taxes while providing priceless "thank you's."
The simplest way to do so is also likely the most well-known: the $12,000 annual gift-tax exclusion. An individual can transfer stocks, bonds, certificates of deposit, cash or $12,000 of land or real estate to any one person once a year without paying federal estate taxes to as many people as he or she wants. In the case of a married couple, they may choose to give away $12,000 each. Direct payment of tuition and medical expenses are also excluded. Planners also say that many of their clients are not aware that the $12,000 gift doesn't count towards the $1 million lifetime gifting limit.
These exclusions can permit larger families to transfer a significant amount of wealth over time at no transfer-tax cost, according to Burt Levitch, JD, a partner at the Beverly Hills-based Rosenfeld, Meyer & Susman. He notes, however, that there's progression of possible gifting strategies after the annual exclusion gifts, which include the use of the $1 million lifetime gift-tax exemption, and then, gifts on which gift tax needs to be paid.
But "the tax tail should never wag the dog," Anita Rosenbloom, a partner at national law firm Stroock & Stroock & Lavan, points out. She likes to hear first what her clients' objectives are before having discussions about gifting or inheritance strategies to save taxes.
The client, who is likely seeing an estate planner because his or her accountant or lawyer advised it, may want to discuss a will, retirement planning, or tax-saving strategies when the topic of potential beneficiaries, Uncle Sam and some of the different techniques come up. It's during this discussion that the planner learns about the client's needs, both financial and emotional.
Rosenbloom says she asks the client to pretend that there are no tax implications. "I ask, 'what are their non-tax objectives for their family members or intended beneficiaries?' " she says.
Interestingly, during this discussion with a client, "the most formidable force of resistance is the unwillingness to give up control over the gifted property. Generally, to make any progress in saving taxes, the individual must give up some level of control over the gifted assets," she says.
"You don't want to butt heads with someone's psychology," says Amy Holzman, JD, of New York-based law firm of Guzov Ofsinks, adding that some of her clients "feel poor but are rich."
"I try to assess their level or need for control, which in turn helps me determine how likely they are to want to 'let go' of assets and the income the client can produce," says Levitch with Rosenfeld, Meyer & Susman. In his experience, "clients are reluctant to take any steps that, in their perception, could leave them hungry and homeless in their old age," Levitch explained, adding that it can be difficult to convince an elderly client that he is not putting himself in financial jeopardy by being "generous."
"They may have issues with giving up control of the property, or, as is the case with some clients who were raised in the depression era, no matter how wealthy they are - and you can show them the numbers -- they still feel they can't afford it," says Richard J. DiMarco, of Westport, Conn.-based law firm Cohen and Wolf, P.C.
Rick B. Lehrer, president and founder of New York-based independent insurance brokerage firm The Cambridge Organization, has also taken the role of social worker or counselor of sorts with his clients, who may be undergoing a shift in thinking as they become grandparents and develop the tendency for the generosity they couldn't afford - or chose not to have - as parents.
When questions about estate preparedness arise, "there are huge psychological issues," Lehrer explains, noting that many of his clients say that as long as the will is in order, why do more? He frequently hears clients in favor of inheritance say, "I don't want to gift now because the kids are going to inherit whatever I have left."
This is understandable, Rosenbloom says, especially if gifting involves giving sums of money to young children.
"Each parent or grandparent has a different perspective about whether children should receive large sums of money before they have established themselves in their own careers or jobs; it can be a disincentive to being productive," Rosenbloom says. Wonder how Paris Hilton would've turned out had it not been for the family trust?
"Another important consideration is whether the gift or inheritance should be outright or in trust," Rosenbloom says, explaining that trusts afford both the client and their beneficiaries certain protections. "These non-tax aspects are as important, if not more important, than the potential tax savings," she says.
But for Rosenbloom, "the best way to save taxes is to enjoy life and spend one's assets." |
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