‘Rare time’ to structure low-cost deals
Amid an uncertain political climate in Washington, North Bay estate-tax attorneys are urging clients to plan now, before a bevy of favorable rates expire at the end of this year.
“They’ve really got to move quickly,” Nick Donovan, a partner at Napa law firm Gaw Van Male, said of high-wealth clients who may have not begun planning. “There are options, and it all has to be done by the end of the year. It really is a limited window.”
At the end of 2012, Congress is set to let exemption rates of $5.12 million per person, or $10.24 million per married couple, expire to pre-2010 rates of $1 million per person, or $2 million per couple.
That significant difference in income can radically change plans in terms of gifting estates, businesses or assets to those receiving inheritances or gifts, according to local experts.
Additionally, a tax rate of 35 percent for gifts exceeding the $5.12 million threshold would revert to a much steeper rate of 55 percent without Congressional action.
The Obama administration and Congress could vote to extend the current rates or reach some form of compromise, but that’s a variable attorneys say one shouldn’t bet on. So for now, law firms and tax specialists expect to see a flurry of activity between now and Dec. 31.
But even without the impetus of expiration, local experts said the current rates are indeed favorable, making now the ideal time to plan on a practical, not simply political, level.
“It’s a rare time in my career when you can make gifts and structure transactions with such low interest,” said Malcolm Manwell, a partner with Santa Rosa law firm Perry, Johnson, Anderson, Miller & Moskowitz. “We don’t know if Congress will extend this present regime or just let it lapse. In any event, the last two years have been a remarkable time to do some gifting.”
Ron Wargo, a partner with Santa Rosa law firm Friedemann Goldberg, said there’s no time like the present, not simply for favorable rates but also because assessing the value of gifts — be it an estate or a family business — can be a long process itself. With the end of the year just around the corner, high-worth individuals would need to move fast.
“People have to be thinking about it now, because the appraisers are going to be very busy,” Mr. Wargo said.
The filing threshold has gradually increased from $675,000 in 2001 to $3.5 million in 2009. The estate tax was temporarily repealed in 2010, but was reinstated on a retroactive basis with the $5 million exemption and 35 percent rate in December 2010.
Mr. Donovan, of Gaw Van Male, noted that not all individuals may think they’re wealthy enough to benefit from the current rates.
“Some people think they are really for the wealthy, but if you have a business that’s worth a few million dollars, all of a sudden you’re going to be in the bracket,” he said.
Mr. Wargo, of Friedemann Goldberg, likewise urges clients to think carefully about their assets. Not everyone may need to act urgently, but they should certainly be aware of the shrinking window and overall value of what can be gifted.
All the experts agreed that without careful planning, those seeking to make gifts can inadvertently cause a financial strain upon the receiver of the gift, largely because of income and capital gains taxes.
While political action is needed to address the looming expiration, Mr. Manwell, of Perry, Johnson, Anderson, Miller & Moskowitz, anticipated Congress would extend the rates for one year and kick the issue to the next session.
“Congress can’t really deal with a major controversial change, and this is one of those major issues,” he said.
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