"Permanent" is a key word wealthy families and their advisors have locked onto in the aftermath of the nail-biting fiscal cliff negotiations, but it's still too early to get too comfortable, according to a panel of experts.
The American Taxpayer Relief Act of 2012, passed by Congress on January 1 and immediately signed into law by President Obama, made permanent the $5 million per person exemption from estate, gift and generation-skipping transfer taxes, as well as a 40% wealth transfer tax rate. This brought some certainty to wealth transfer planning.
But “permanent” is a term of art, Carol Kroch, managing director for wealth and philanthropic planning at Wilmington Trust, said during a press briefing yesterday. “This story may not be over yet,” she said, noting that Congress has yet to deal with the debt ceiling and significant open issues.
Still, good news is good news, she said. The GST exemption is indexed for inflation, raising it to $5.25 million in 2013, and this may increase in future. In addition, portability was made permanent, allowing a surviving spouse to use any unused exemption of his or her deceased spouse for either gift or estate tax purposes.
During the briefing, Kroch’s Wilmington Trust colleagues discussed concerns and trends among their wealthy clientele.
Kemp Stickney, chief fiduciary officer and head of family wealth, said that planning and governance have been the earmarks of successful families that extend beyond the third generation. During the fiscal cliff showdown, they worried about taxes and the GST transfer and investment rates. More generally, Stickney said, they have been concerned about their children and grandchildren losing an incentive to lead productive lives. They educate their children early to understand the difference between objective counsel from their advisors and advice that is weighted to the advisor’s interest.
Many wealthy families engage in serious philanthropy, Stickney said, and the new tax changes will affect their charitable activities. Some will continue to funds projects at their usual levels. Others will hold off out of worries about being able to sustain their lifestyle, for example, by not donating a fine art collection to a museum.
Larry Gore, managing director and president of Wilmington Trust’s New York office, noted a trend among wealthy families to consolidate advisors to two or three. The goal of Wilmington, and of its competitors, is to become the “trusted advisor” to its clients.
Finding a trusted advisor is a keen topic among wealthy women. Kathy Karlic, chief client officer, cited some well-rehearsed statistics about women and wealth: many trillions of dollars will flow into women’s hands in coming decades; baby boomer women now have the most spending clout; and 80% to 90% of women at some point will be alone. These women need financial education, and they will seek advice from those who can empathize with their special concerns and needs. Woe to advisors who fail to understand this.
It is not unusual for advisors to male entrepreneurs to focus on the man and perhaps his children, but ignore the wife and mother, Thomas Rogerson, senior managing director and family wealth strategist, said. But when the man dies, will his widow turn to that advisor or go elsewhere? Research has shown that many women change advisors after the death of a spouse.