Wealthy Families' Living-Gift Strategy

An 84-year-old widow gathered her children at the Chicago office of the McDermott, Will & Emery law firm recently and told them they were going to get a special Christmas gift this year: half her $20 million fortune.

The decision to pass on her money while still alive was prompted by the congressional deadlock over renewing Bush-era tax cuts that could make providing for her heirs prohibitively expensive if she dies after Dec. 31. Estates are exempt from tax this year, and the rate shoots up to 55 percent next year unless lawmakers act in a post-election session.

Short of a timely death by Dec. 31, the only way families may avoid a huge increase is with a gift. This year the gift tax is a historically low 35 percent, equal to the top marginal rate on ordinary income. It, too, jumps to 55 percent next year. Families can lock in the lower rate by making gifts before Jan. 1. "She said, 'I don't want anyone wishing I was dead,' " says the widow's lawyer, Domingo Such, who declined to identify his client.

The repeal of the estate tax this year—the economist Paul Krugman has called it the "Throw Momma from the Train" law—has generated much black humor about unfortunate accidents befalling wealthy parents as Dec. 31 approaches. Such says his client made a clear-headed bet that she could reduce her tax bill by as much as 40 percent by rewarding her heirs immediately. "This is the lowest rate that the gift tax has ever been at; it's only going to get higher," he says.

Lawmakers have long matched the gift-tax rate with estate taxes to prevent the wealthy from ducking the IRS. Gifts of more than $1 million usually are taxed at the same rate as estates—except for this year. The rates were set in 2001 as part of an effort by then-President George W. Bush and his GOP allies to abolish the estate tax. After opposition from Democrats, they had to settle for a gradual reduction over a decade, culminating in a one-year repeal for 2010.

Joshua Rubenstein, head of the estate and trust practice at New York's Katten Muchin Rosenman, says many wealthy people are hedging their bets by waiting until late December to transfer large sums to heirs. That's in case the giver dies before Dec. 31, in which case a tax was needlessly paid. "This is going to be the craziest yearend ever," Rubenstein says.

The bottom line: This year's 0 percent estate tax, which zooms to 55 percent on Jan. 1 unless Congress acts, has some families resorting to mega-gifts.

Taxing Calculations:


Current Top Rates: 0%
Top Rate as of Jan. 1: 55% on estates of $1 million and more
Obama Proposal: 45% as of Jan. 1, exempting the first $7 million
Bipartisan Proposal: 35% as of Jan. 1, exempting the first $10 million*


Current Top Rates: 35%
Top Rate as of Jan. 1: 55% on gifts of $1 million and more
Obama Proposal: 45%
Bipartisan Proposal: 35%*

* As proposed by Senators Jon Kyl (R-Ariz.), Blanche Lincoln (D-Ark.), and Mitch McConnell (R-Ky.)

    Before it's here, it's on the Bloomberg Terminal.