Marisa Alvarado, a director at the Irvine accounting firm Haskell & White LLP, is anticipating a busy rest of the year.
“I’m kind of worried that it’s going to be a mad dash later,” Alvarado said. “I have heard valuation people saying they’re going to be so busy now until the end of the year.”
She and others in the money-management business are talking about giving wealth to younger generations—and quickly. There are just nine months left to take advantage of a historically favorable tax environment for such arrangements.
Gift-tax laws set in 2010 offer unprecedented levels of advantages but will expire at the end of this year if Congress does not act.
“It’s at the lowest tax rate ever and the highest exemption ever,” noted Alvarado, who leads the advanced estate and gift taxation services at Haskell & White.
“2012 might be the last year that people could be utilizing those two very advantageous planning techniques,” she said. “The current gift tax rate of 35% is the lowest it’s been since 1934.”
Exemption
An exemption of up to $5.12 million—adjusted from an original $5 million sum, to account for inflation—is available under current rules.
“The amount that can be passed to the junior generation tax-free generally [had previously] been $1 million,” said Carsten Hoffmann, a managing director of the Irvine-based valuation firm FMV Opinions Inc. “It really is a once-in-a-lifetime window of opportunity. Exemption has never been larger in the history of the U.S.”
Industry insiders outline a few possible scenarios for when Jan. 1, 2013, comes around.
“Either the exemption amount goes back to $1 million or the estate tax might be repealed altogether,” said Paul Marx, the senior trusts and estates partner at the Costa Mesa-based law firm Rutan & Tucker LLP. “But that’s not a high probability. The third possibility is that the exemption amount will be set at (a compromise of) $3.5 million per person.”
Rutan is the second largest-law firm based in Orange County based on the number of lawyers here.
The uncertainty for next year is expected to drive a lot of activity in a number of professional services this year, said Allan Siposs, managing director of FMV Capital Markets LLC, the investment banking affiliate of FMV Opinions.
“This affects the valuation side, CPAs, estate attorneys and people who own significant wealth,” Siposs said.
Orange County has a lot of real estate owners who fall into that category, he added.
Haskell & White’s Alvarado said she’s seen some movement in gifting last year and so far this year.
“But not nearly as much as I had expected,” she said. “This leads me to believe it’s probably going to be a busy nine months before the end of the year.”
FMV’s Hoffmann has similar concerns.
“At year end, there could be a giant bottleneck of high net-worth individuals saying, ‘Oh, my gosh,’ and law firms or valuation firms may not be able to accommodate all of them,” he said.
Inertia
Siposs said inertia might be in play for many families.
“If a family with a lot of wealth has historically not done [estate planning], it’s important to understand that … has got to change,” he said. “They need to break the mold and take some proactive steps to take advantage of the situation.”
Rutan’s Marx noted concerns over the risk of a “clawback.”
That’s when today’s tax-free gift would become taxable under the estate tax at the time of the donor’s death. That could happen if the gift exemption amount at that time is lower than the amount that was gifted.
The risk of a clawback should not deter somebody who can afford to make a gift from doing so, Marx said.
“But again, you have to be able to afford it,” he said. “When you give property away, you are also giving away the cash flow that is associated with it. Oftentimes, the donor may have substantial wealth but may also have a [high-cost] lifestyle and can’t afford to part with it.”
Lifestyle and psychology no doubt play a big role in estate planning.
“It’s interesting what we find within the psychology, in terms of what people want to retain to be comfortable,” said Kevin Tiber, senior vice president and chief operating officer of Farmers & Merchants Trust Co. “Some folks have significant anxiety giving anything away as a lifetime gift. We as advisers have to read that.”
Tiber cautions that these tax advanta- ges should not be the only reason behind gifting.
“You don’t want to do something without a good intent based purely on this loophole,” he said. “You may be pushing a considerable amount of assets to a generation that may not be ready to take that.”
