WSJ: How to Control Your Heirs From the Grave

WSJ: How to Control Your Heirs From the Grave

Can you force a grandchild to take a drug test in order to receive an inheritance? Insist your heirs use trust funds only for tuition at your alma mater? Make sure your wife’s future husbands can’t run through money you worked hard to earn?

In many cases, the answer is yes—you can, in effect, control your heirs from the grave.

The issue of what you can give away and how is especially relevant now because unusually favorable estate- and gift-tax rules are set to expire. The “exemption” for both—which is the amount of assets a taxpayer can transfer to others, tax-free, either at death or through gifts while alive—is now $5.12 million per individual, and twice that for a couple. The top tax rate on amounts above that is 35%.

But not for long. In January the exemption is slated to drop to $1 million per person, and the top tax rate will jump to 55%. Although many experts don’t think those changes will stick because they are so unfavorable, a new regime might well be less generous. President Barack Obama favors a $3.5 million exemption and a 45% top rate.

With the law in flux, experts are recommending that wealthier taxpayers who can afford to part with assets make gifts of them this year. The rationale: if the law becomes less favorable, this year’s gifts either will be grandfathered in or, at worst, won’t be “clawed back” until death. …

As with many good tax deals, there is a hitch: Taxpayers taking advantage of the exemption by making gifts have to give up control of assets today. Typically that means putting them into “irrevocable trusts” that require upfront decisions about who will get what, when and for how many years thereafter.