New Risks to Wealth Management

Traditional risks related to the family’s wealth (including financial, intellectual and social assets) include the wealth management image, estate planningillness or death of the key family stakeholder, economic downturn and changes in the regulatory or legal environment. New risks are triggered by the dissipation of wealth due to generational mathematics –with each ensuing generation, the wealth is splintered – and the lack of creation of new wealth. This is a very turbulent economic time, with the increased complexity of legal and tax matters and the increased complexity of wealth management choices. These risks can be mitigated when the family coordinates its advisors and monitors the integration of all professional services.

The risks are further mitigated when the family embraces and encourages financial education and financial literacy across the generations. Mentoring, shadowing, and exposure to the concepts and resources along the generation continuums reduce the chances for unintended consequences.

New Risk: The Bracket Game: To Gift or Not to Gift…That Is The Question…..

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the Act). The Act significantly changes the federal estate tax, which impacts estate planning for many, and also presents significant estate planning opportunities. The biggest surprise in the new law is the ability to give away $5 million of assets now and remove those assets and any appreciation in their value from the donor’s taxable estate. In a marriage, this doubles the amount to $10 million. This law is in effect until December 31, 2012, and it is unclear what the state of the law will be from 2013 on.

This significant increase in the gift exemption adds to the donor’s ability to gift the annual exclusion of $13,000 each year and the donor’s ability to pay anyone’s tuition and medical expenses as long as payment is made to the provider.

The Act has prompted spirited discussions, “Well, now that I can really give that much, should I? What are the non-tax risks to making those gifts?”

Factors to consider when deciding whether to gift or not to gift:

  1. How much is enough?

    This question is always worth discussing. Warren Buffet’s answer is, “Leave your children enough money so they can do anything, but not enough that they don’t have to do anything.” (Although Buffet did not leave his children the bulk of his fortune, he did leave each of them a foundation of $1 billion dollars to give to the charities of their choosing.) In my experience, the answer depends upon the individual, often changes over the lifetime of the donor, and has to do with his/her children and the economic times.

  2. What strings do I want on the gift?

    Whatever the amount, you must decide how much control there is over the gift. Is it to be given outright? In trust? Who is the trustee? How long should the trust extend? What are the terms of distribution? Who are the permissible beneficiaries?

    Note that a gift is different than a sale- there are some techniques such as IDITs that have cash going back to you- they are a sale not a gift and that is why strings are permissible.

  3. Should I leverage the gift?

    In addition to the strings that you want to impose on the gift, you should also address leverage. If you make a gift that is eligible for a minority or marketability discount, that increases the value of the gift by at least 20%. If you fund an irrevocable trust and anticipate that the trustee will use the funds to make annual life insurance premium payments, then significantly more may be added to the trust through leverage than if the gift were to be invested along more traditional methods.

  4. Am I willing to assume the risk that the gift, once given, is gone?

    What if the gift recipient becomes divorced or has creditor issues during the donor’s lifetime, and the gift is jeopardized? Can you live with that consequence? The cascading effects from a gift can have far-reaching consequences. For example, if the donor parent gifts 20% of the stock in his closely held business to his children; and one of the children becomes divorced, it is not just that the child’s interest in the business may be vulnerable.

    Even if it is not vulnerable, the divorce court also has the right to order the valuation of the child’s interest in that business. To do that means valuing the business in its entirety. Having that asset valued in a hostile environment – where the ex-in-law’s lawyer will try to value that as high as possible – will in all likelihood be in direct opposition to the donor parent’s valuation and appraisals for estate planning and transfer tax purposes.

    In addition, if the donee child is ordered to pay alimony or child support, then the income from the gifted asset will be taken into account when the court establishes the dollar amount. If the income is phantom income, which the child donee does not actually receive, that can present additional complications and litigation.

  5. Am I willing to give up the “fruit as well as the tree”?

    In most cases, the fruit and the tree – meaning the income and the principal – go hand in hand. For example, are you ready to give away 20% of the underlying asset, knowing that the corresponding 20% of the income which is attributable to that asset will also no longer be available to you?

  6. Have I considered gift splitting?

    Gift splitting – where one spouse makes the gift, and the other gives consent to that gift – is a very effective estate planning technique for the second marriage couple. Frequently, in that case, one spouse is wealthier than the other. If the less wealthy spouse does not have $5 million of assets in his/her own right, then using the less wealthy spouse’s $5 million exemption in full or gift splitting, with the wealthier spouse giving his/her assets to his/her own children can be a very creative technique. In effect, it doubles the amount that can be gifted. When considering this technique, especially if there is a prenuptial agreement or postnuptial agreement in place, care should be taken to protect the estate of the less wealthy spouse who consented to this gift or allowed the use of his/her $5 million exemption. The possibility that the exemption could decrease later, resulting in additional estate taxes in his/her estate to his/her beneficiaries, should be thought through and discussed.

  7. Should I gift more than the $5 million/$10 million exemption and incur the 35% gift tax?

    For many very wealthy individuals, this is a question to consider seriously. The gift/estate tax rate has not been this low in eight decades. The difference between a tax-exclusive gift and a tax- inclusive bequest is significant at the higher dollar levels, and exploring this (especially if the underlying assets have significant growth potential or discount opportunities) should be an option.

The best solution is to have a team of strong advisors from different disciplines who know and who trust each other- John Schwan, Heather Davis and I will be discussing this in the next segment- that is what is in the client’s best interest and as long as that what is true north that is what matters the most when mitigating risk.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at To download Annino’s FREE eBook, Estate Planning 101 visit,

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