“The face of wealth” is literally changing with the times, said high-net-worth specialists for Wilmington Trust. Today's rich are younger than they were half a century ago and include same-sex couples, all of whom face multi-generational complexities in wealth transfers.
Beside family funds, pension funds hold one-third of the country's wealth, the highest since the 1990s. "We'll be looking at the biggest wealth transfers among families in history," Lawrence E. Gore, president for Wilmington's northeast region, said at the company's recent fall press briefing that examined the effect of demographic and social shifts on wealth.
Tax strategies, such as lifetime gifting, should be considered as part of this wealth transfer, said Sharon L. Klein, managing director of family office services and wealth strategies. With heads of families living into their 100s, like Brooke Astor who died at 105, the next generation can be in their 80s with grandsons in their 50s, said Klein. Does it really make sense to make them wait until the matriarch dies?
Lifetime gifting, possibly through a family foundation, offers members “the opportunity to enjoy wealth without waiting until they're too old,” she said. “And, they can influence behavior while they're still around to see it.” Some clients may object to the impersonal sound of a private foundation, Klein said, but they may like the concept of a “family bank,” from which members can draw.
Some clients are hesitant to include family members in planning sessions with advisors, since they don't want heirs to know what they'll receive, said Carol Kroch, managing director of wealth and philanthropic planning. “But the rest of the family ultimately is going to find out your plan,” she noted. “The only question is when.”
“Among families who don't include multiple generations in meetings with advisors, there is a greater possibility of the successive generation leaving the advisor firm,” said Gore. Millennials, Kroch added, tend to change advisors more often.
The June Supreme Court ruling that legalized gay marriage also changed, largely for the better, how some couples will handle gifts, inheritances, property settlements when breaking up, alimony and the way terms are configured, said Bruce Hoffmeister, senior wealth strategist at Wilmington. Clients also need their advisor's guidance on questions such as what happens to civil union agreements when a couple marries, which jurisdiction should be followed when trying to decide how long a couple has been together, or should the spouse with greater wealth transfer assets into the other spouse's name.
With 1 percent of the U.S. population holding 40 percent of the wealth, disparity is at its highest point since 1929, Gore said, quoting from research by Berkeley professor Saez Zucman. Zucman writes that according to the Survey of Consumer Finances (SCF), wealth concentration is high and growing: The 1 percent of richest households owned 36 percent of wealth in 2013, up from 30 percent in 1992. In 2012, the top 0.1 percent wealth share was three times higher than in 1978, and almost as high as in the 1916 and 1929 historical peaks. “We also find that today’s rich are younger than half a century ago and have much more labor income,” he wrote.
The accumulation of wealth in the 0.1 percent of the population includes 160,000 tax units with net assets above $20 million, said Gore. The income disparity may provide more fuel for regulators looking at toughening the family wealth rules governing gift taxes, especially Section 2704 of the IRS code, which aims to limit valuation discounts on transfers of family partnership or LLC interests between family members.
Currently, if someone makes a taxable gift of $5 million that is taxable at 40 percent, the gift tax liability would be $2 million, said Klein. But gifts among family members can be argued to be of lesser value, given restrictions placed on transferring business assets. Such caveats may reduce the value that a buyer would be willing to pay. “It might be possible, for example, to take a 30 percent discount for lack of marketability and minority interest,” said Klein. That “would reduce the value of the $5 million gift by $1.5 million to $3.5 million. At a 40 percent top gift tax rate, the gift tax liability would be $1.4 million, a $600,000 tax savings.”
Klein said, the IRS suspects “…individuals are imposing restrictions on family controlled entities for the purpose of artificially reducing the value for gift tax purposes.” Since the agency has had “limited success” in challenging discounts through Section 2704, it is looking at new regulations. “For an individual contemplating making transfers using discounts, it may be advisable to complete those transactions as soon as possible.”
