Permanence Of $5 Million Estate And Gift Tax Exclusion Moves Investor Focus To Whether Heirs Can Handle Such A Large Inheritance

Tuesday, January 22, 2013 08:49
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Permanence Of $5 Million Estate And Gift Tax Exclusion Moves Investor Focus To Whether Heirs Can Handle Such A Large Inheritance

Tags: client education | estate planning | new tax rules

Many investors breathed a sigh of relief when the estate and gift tax exclusion of $5 million was made permanent right at the end of 2012.
 
Then a new reality dawned on them: are their heirs capable of handling what could end up being a $10 million inheritance?

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The new rules actually allow individuals to shelter $5.25 million, making the allowance for couples $10.5 million.
 
They also kept the unified status of the two, making it possible for individuals to give away their entire exclusion over the course of a lifetime.
 
Wealthy families who can take advantage of the exclusion are concerned it will cause their heirs to become lazy and unproductive.
 
For that reason, many are putting the money in what are called silent trusts that do not reveal the amount of an inheritance until later.
 
Toward the end of 2012, investors were scrambling to put as much money in such trusts as possible in anticipation of a change in the tax rules.
 
And there are still certain loopholes in methods to value property and other tax reduction tactics that could be eliminated later this year.
 
Trusts also can protect assets from disgruntled ex-spouses and creditors. Currently, only 13 states allow the quiet or silent trusts but rules in another 19 imply that they are permitted.
 
The caveat is that silent trusts make it more difficult for trustees to fulfill their fiduciary duty of keeping beneficiaries informed about their investments. This makes it difficult to get feedback from beneficiaries on their investment goals.
 
In many cases, grantors of the trust designate who the trustee reports to and how often those reports are made. Heirs can feel resentment if one day they find out they will have a nice inheritance when they could have used the money earlier in life to further careers or other life goals.
 
Like many so-called asset protection instruments, quiet trusts should be utilized within the context of helping heirs live a fulfilling and productive life. That may mean the grantor’s goals may not be the only ones that need to be considered.
 
In asking whether heirs can handle such a large inheritance, a better question might help resolve the issue. That question is how well have I educated my heirs to handle such an inheritance and how can I mentor and support them in reaching their life goals?

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