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Wealth Managers Need To Act, Wilmington Warns

Charles Paikert

18 October 2011

The clock is ticking for estate planners, warned Carol Kroch, managing director of charitable trusts and head of wealth and financial planning for Wilmington Trust, at a press briefing in New York yesterday.

Noting that only 15 months remained until the expiration of the 2010 Tax Act, which set a maximum rate of 35 per cent with a $5 million exemption for estate taxes, Kroch urged wealth managers to take advantage of this “great opportunity” while it lasts.

“This is a huge opportunity for families with over $1 million to pass on,” Kroch said, noting the law also provides favorable terms for gift and generation-skipping transfer tax. “Those who are affected by the law should take advantage of this narrow window. You just don’t know what’s going to happen next.”

Kroch pointed out that the estate tax is set to revert to a $1 million exemption and a 55 per cent tax rate in 2013 and favorable rules may also change. Delaware Dynasty Trusts, she said, are becoming increasingly popular and offered wealthy families particularly favorable planning opportunities.

The trust, she explained, is perpetual, extends beyond the lifetimes of the initial beneficiaries and is intended to take advantage of the generation skipping tax exemption as well as the lifetime tax exemption. Once the Dynasty Trust is funded, none of the future appreciation earned by the trust will be subject to the estate or the GST tax.

But the clock is also ticking on maximizing the advantages of the Dynasty Trust, Kroch cautioned, noting that the Obama administration has proposed that in 2012 the duration of the trust’s generation-skipping tax exemption be limited to 90 years.

In addition, Kroch urged wealth managers to take advantage of continuing “pretty amazing” low interest rates for interest-rate sensitive gift vehicles.

For example, she said, low-interest loans, when properly structured, “are not treated as gifts and provide credit and/or investment opportunities for family members.” And gift vehicles that are funded with assets that have a depressed or discounted value and are likely to appreciate are particularly attractive, Kroch added.

Family offices also face a looming deadline in less than six months, said Linda Bourn, managing director of family wealth for Wilmington. Family offices have until 30 March 2012 to decide whether to register with the Securities and Exchange Commission under the provisions of the Dodd-Frank Act.

“Families very much want to stay together,” Bourn said, and are currently huddling with their lawyers to review their current level of compliance with the SEC’s new “Final Rule.”

The biggest problem facing families, according to Bourn, is whether to control or outsource investment functions. Many families are considering forming a private trust company, captive insurance company or private family bank, she said.

But, Bourn cautioned, “some of these structural approaches may trade one set of government regulators for another.”