The Wall Street Journal
Weekend Investor – Family Value – March 17, 2012
The Rush to Avoid Gift Taxes
How to Make Sure You Don’t End Up With ‘Donor’s Remorse’
By Kelly Greene
As the deadline approaches for taking advantage of the government’s $5 million gift-tax exemption, estate planners are dealing with the fear of “donor’s remorse.” Families are looking to set up so-called irrevocable trusts to pass along assets to their heirs without paying gift tax—but worry they will change their minds later in life or will need to get the money back one day.
An irrevocable trust can’t be undone, making it one of the best ways to move assets out of an estate—and thus avoid estate taxes.
But what if you run out of money later in life? Or have a fight with one of your kids? Or want to change the terms if your son develops a drug problem, or your daughter turns into a shopaholic? If you have an irrevocable trust, you generally are out of luck.
Comments March 17, 2012
While many 529 investors know investment income, interest and gains are tax-free if the money is used for qualified higher education expenses, they do not know 529s are one of the most powerful, lowest cost estate planning vehicles.
Contributions made to a 529 are removed from your estate. Unlike most estate planning solutions that remove assets from estate and leave little control over investments and beneficiaries, the 529 allows owners to change investments and beneficiaries every year. Because 529 owners can name a successor to the account when they pass away, a 529 can be used for multiple generations – without taxation.
In addition, you can contribute up to $65,000 to an unlimited number of beneficiaries. If you are a married couple you can contribute $130,000 to an unlimited number of beneficiaries. You can repeat this process every five years.
But, what happens if you run out of money later in life or the very next day, for that matter? No problem. You can simply withdraw the money from your 529 account(s) for purposes other than qualified higher education expenses. Although there are a few exceptions to your advantage, the principal withdrawn is tax-free while the appreciated amount withdrawn is subject to income tax and a modest 10% federal penalty. The taxes and penalty on the appreciated amount withdrawn (after potentially decades of tax-free growth) can be an attractive tradeoff for protecting your estate and retaining the flexibility to withdraw the money whenever you need it for any reason.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.