The Pacella Law Group

What is a wealthy American to do? A temporary Internal Revenue Service tax exemption that was passed in 2010 is set to expire at the end of 2012. Will it be renewed? Will it truly expire? Only Congress knows for sure, and even they don’t know.

Those who wish to pass along $ 5.12 million to their heirs through a well-thought-out estate plan, have until December 31, 2012 to take advantage of a transfer of assets with no taxes owed and a relatively low 35 percent tax status for anything more than $ 5.12 million. For some people this is proving to be a tough decision.

According to industry experts, there are pros and cons involved in this decision. For those wishing to save on taxes, the gift could be given now tax free. The parents could save on estate taxes too for anyone who dies in 2012. However, is giving $ 5.12 million to a 21-year-old a good idea? Will it sap their motivation? Will they spend it or save it?

Apparently a $ 5.12 million dollar gift to a 30-year-old could grow to nearly $29 million if earning six percent for 30 years. The 30-year-old could use it for philanthropy and be a mini-Bill Gates. But what if they don’t? What if the 30-year-old is a mini-Gary Coleman instead?

The clock is ticking on this decision. One thing that most financial analysts seem to agree on is that this financial decision is more than about simply saving on taxes and compounding interest. It is about how you’ve raised your children and what kind of adults you believe them to be. It is also about the age of the children. If they are younger, a trust may make more sense. If they are older, a gift may give your children more flexibility and financial options.

Experienced legal counsel and communication with your heirs should be part of this decision. Sadly, Congress will probably not be able to communicate their plans prior to the end of the year.

Source: The New York Times, “To Give or Not to Give, Up to $5.12 Million,” Paul Sullivan, June 22, 2012.