Sharing A Wealth Of Values

BERLIN – With unprecedented wealth poised to transfer to the next generation, the creators of that wealth are giving serious thought to how they want to build a strong, lasting legacy. Minimizing estate and gift taxes has always been important, but “our clients today want to transfer their family values and to have their legacy managed in a way they deem appropriate,” says Chris Heilmann, Chairman and CEO of Merrill Lynch Trust Company. And with people living longer, parents and grandparents are making lifetime gifts to experience the joy of watching younger generations benefit.

Currently, individuals can give up to $12,000 per beneficiary per year without any gift-tax consequences (married couples can give up to $24,000 per beneficiary each year). For gifts above this amount, there is a $1 million cumulative lifetime exemption ($2 million for married couples) before gift taxes are due. But allocating the funds is only one step toward a more meaningful gifting strategy. There are several options for making tax-efficient gifts that give you more control over how your gifts are used.

Say you and your spouse want to start giving $24,000 annually to each of your minor grandchildren, but you do not feel comfortable making such large gifts outright. One solution may be to establish a Uniform Gifts or Transfers to Minors Act account. However, these accounts must be turned over to your grandchildren when they come of age — either 18 or 21, depending on the state. If you are concerned they will be too young to control substantial funds, you may want to consider a 2503(c) Trust (named after the relevant Internal Revenue Code section) or a Crummey Trust (named after a case decided decades ago). Gifts to each of these trusts qualify for the annual gift-tax exclusion. With certain limitations,1 these trusts can be structured as you see fit. You may decide, for example, that you’d like the trust to pay for college expenses and allow your grandchild to withdraw half of the remaining principal at age 25 and the rest at age 30. “Structuring a trust this way,” says Heilmann, “gives you the chance to talk to your grandchildren about how you hope they’ll use your gift.”

Another reason to put annual gifts into a trust is to shelter the growth of those assets, which may be sizeable. “If you earmark assets for your grandchild, but hold them in your own name, you may find the amount exceeds your annual exclusion when it comes time to make the gift years later,” says Heilmann.

Each individual has a $2 million ($4 million for a married couple) generation-skipping transfer (GST) exemption. Married couples can fund a dynasty trust with all or part of their combined $4 million GST exemption, and the growth of those assets will be free of estate and GST taxes when grandchildren or great-grandchildren receive distributions.

Of course, gift taxes apply to dynasty trusts created during your lifetime, but married couples can apply their $2 million gift-tax exemption, only paying taxes on the remaining amount. As with other trusts, you can dictate the use of the assets according to your wishes for each beneficiary. Because the trust is intended to last for several generations, most people build in a high degree of flexibility regarding distributions and investments.

The key to determining what gifting vehicles will work best for you and your family is to start with open communication with your family and advisors.

Your Merrill Lynch Financial Advisor and other trust professionals can help you find the right solutions to transferring your assets based on your specific goals and values, and to ensure that your legacy will continue for years to come.

(The writer is a Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-9084.)