Jan 14 (Reuters) - An unexpected tax break for the wealthiest Americans has some of them wondering if they were too generous during the final weeks of 2012.
Last year Americans were able to gift up to $5.12 million tax free to family and friends over a lifetime as part of their estate, an amount separate from the tax-free amount anyone could annually give per person, $13,000 last year.
Most tax advisers and their wealthy clients expected the $5.12 million to drop to $3.5 million or even lower on Jan. 1 - leading to a scramble among the wealthy to make big gifts before the end of 2012.
But, in a surprise to estate planners and lawyers, who scrambled to help clients give money, property and business interests before the clock struck midnight on Dec. 31, the "fiscal cliff" deal, hammered out by the U.S. Congress at year end, retained the $5.12 million exemption level, even tossing in an extra bump to account for inflation.
That made the new year a bit bittersweet, leaving some people with what financial and tax advisers call a case of "gifting remorse." Some wealthy clients have told their advisers they felt they had rushed into giving too much or too soon, decisions made under the then very real threat of leaving heirs with a heavy tax burden down the road.
Clients who want to undo their gifts are probably out of luck, several tax experts said, because in order for them to get the tax benefit in the first place, the gift had to be irrevocable. But for them, advisers say, there's still a solid silver lining - getting estate planning out of the way.
"After they get over the shock ... it was something they should have done regardless," said Leigh Griffith, head of the tax practice group at the Nashville, Tennessee-based law firm Waller.
Among the perks for having made a gift last year: the money is better positioned for heirs, and if it is in a trust, it is protected from creditors and could still potentially be indirectly accessed by the benefactor. And the grantor may have even found a good way to test their heirs' ability to handle a windfall - allowing time to adjust future decisions about whether to give more.
Mary Schmidt, a Boston-based trust and estates lawyer, was mingling at a New Year's Eve party when she found herself comforting a friend who was second-guessing a decision to give away $5 million.
The friend regretted his rush to gift the sum to his children, questioning whether it was necessary. She talked the man down - something more than a few advisers may be doing these days - explaining how the gift would benefit his estate.
The biggest benefit: the wealthy and the gift recipients get more bang for their buck by giving early. Say the client gave 50,000 shares of stock worth $5 million. If the client had waited a few years, and the stock appreciated, he or she wouldn't have been able to gift as many shares, leading to a bigger tax bill later.
A few other benefits:
- Most people made their gifts via trusts, where the assets are better protected from creditors. So if, say, the giver gets into legal trouble, the gift can't get tied up in a lawsuit.
- Clauses in some trusts give the benefactor some control over the money. For instance, many people took advantage of spousal access trusts, meaning their spouse is a beneficiary of the gift along with other heirs. As long as they remain married and the spouse is alive, the benefactor can indirectly access the money via the funds that flow to their spouse.
- Many trusts also come standard with a "right of substitution clause," so that if a person regrets giving a particular asset, they can replace it with something else of equal value.
That clause may come in handy for Rob Romanoff, managing partner at the Chicago-based law firm Levenfeld Pearlstein, who has a client who wants to undo the $5 million gift he made to his wife and children after the exemption level stayed the same.
Romanoff quickly discovered that the client didn't regret the bulk of the gift, given through a spousal access trust, but instead wanted to regain control of a $75,000 stake in a tech start-up he expects to take off. If the man continues to feel this way, Romanoff will help him take out that stake and replace it with $75,000 in cash or another equivalent asset.
The gifts may also provide benefactors with a glimpse of how well their heirs may one day handle a windfall.
Griffith, the lawyer, worked with a couple last year who were initially reluctant to give several million dollars to their grandchildren, who had never handled such a large sum.
The couple eventually did so, with a twist that could teach the grandchildren some investing lessons. They set up a trust that encourages the grandkids, who are in their late 20s and early 30s, to provide investing recommendations to the trustees. The couple has been getting calls from their grandchildren, asking them for investing advice ever since.
If nothing else, giving in 2012 helped clients focus on the fact that they got this planning out of the way.
"It's nice to have the luxury of the bulk of the planning in place, and now, going forward, to improve upon it," said Jennifer Immel, senior wealth planner at Philadelphia-based PNC Wealth Management.