Bruce Sires Quoted in Investor's Business Daily on Inheritance Transfer

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2012 Year-End Tax Planning Tips

Year-end planning is a bigger challenge this year than in past years because, unless Congress acts, tax rates will go up next year, many more individuals will be snared by the alternative minimum tax (AMT), and various deductions and other tax breaks will be unavailable. To be more specific, as a result of expiring Bush-era tax cuts, unless Congress ascts, individuals will face higher tax rates next year on their income, including capital gains and dividends, and estate tax rates will be higher as well. The AMT problem arises because, for 2012, AMT exemptions have dropped and fewer personal credits can be used to offset the AMT. Additionally, a number of other tax provisions expired at the end of 2011 or will expire at the end of 2012. Rules that expired at the end of 2011 include, for example, the research credit for businesses, the election to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes, and the above-the-line deduction for qualified tuition expenses. Rules that will expire at the end of this year include generous bonus depreciation allowances and expensing allowances for business, and expanded tax credits for higher education costs.

These adverse tax consequences are by no means a certainty. Congress could extend the Bush-era tax cuts for some or all taxpayers, retroactively "patch" the AMT for 2012 to increase exemptions and availability of credits, revive some favorable tax rules that have expired, and extend those that are slated to expire at the end of this year. Which actions Congress will take remains to seen and may well depend on the outcome of the elections. While these uncertainties make year-end tax planning more challenging than in prior years, they should not be an excuse for inaction. Indeed, the almost certain prospect of some higher taxes next year makes it even more important to engage in year-end planning this year. To that end, we have compiled a checklist of actions that may help you save tax dollars if you act before year-end. Many of these moves may benefit you regardless of what Congress does on the major tax questions of the day. Not all actions will apply in your particular situation.

We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make. We also should schedule a follow-up for later this year to see whether the November election results will require changes to year-end planning strategies.

 Year-End Tax Planning Moves for Individuals  

  (1)   Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It would be advisable for us to meet to discuss year-end trades you should consider making. 

(2)   If you are thinking of selling assets that are likely to yield large gains, such as inherited, valuable stock, or a vacation home in a desirable resort area, try to make the sale before year-end, with due regard for market conditions. This year, long-term capital gains are taxed at a maximum rate of 15%, but the rate could well be higher next year as noted above. And if your adjusted gross income (as specially modified) exceeds certain limits ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others), gains taken next year (along with other types of unearned income, such as dividends and interest) will be exposed to an extra 3.8% tax (the so-called "unearned income Medicare contribution tax").

(3)   Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes.You can give $13,000 in 2012 to each of an unlimited number of individuals but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. Savings for next year could be even greater if rates go up and/or the income from the transfer would have been subject to the 3.8% tax in the hands of the donor.

 Year-End Moves for Business Owners

(1)   If your business is incorporated, consider taking money out of the business by way of a stock redemption if you are in the position to do so. The buy-back of the stock may yield long-term capital gain or a dividend, depending on a variety of factors. But either way, you'll be taxed at a maximum rate of only 15% if you act this year. If you wait until next year to make your move, your long-term gains or dividends may be taxed at a higher rate if reform plans are instituted or the Bush-era tax cuts expire. And if your adjusted gross income (as specially modified) exceeds certain limits ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others), gains taken next year (along with other types of unearned income, such as dividends and interest) will be exposed to an extra 3.8% tax (the so-called "unearned income Medicare contribution tax"). Keep in mind that you will need expert help to plan and execute an effective pre-2013 corporate distribution.

  

(2)   Set up a self-employed retirement plan if you are self-employed and haven't done so yet. 

(3)   Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner's share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro rata share of an S corporation's losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the S corporation.

 

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.  Please contact a member of the Tax & Wealth Planning Group for more information.

Estate Planning Alert: Potential Changes from the Congressional Super Committee

 by Geoffrey Weg 

The Joint Select Committee on Deficit Reduction (the "Super Committee"), a 12 member bipartisan Congressional committee, is scheduled to announce its proposals on Wednesday, November 23rd for reducing the national deficit by at least $1.5 trillion over the next 10 years. While the Super Committee's proposals are technically secret until November 23^rd, rumors have begun to circulate among tax and financial advisors about possible changes to the current estate, gift and generation-skipping transfer tax laws, including a proposed early reduction of the $5 million estate, gift, and generation-skipping transfer tax exemption.  The exemption is currently set at $5 million through December 31, 2012, after which it will revert to $1 million barring further congressional action. Other rumored changes include a return to higher estate, gift, and generation-skipping transfer tax rates, imposing minimum terms on grantor-retained annuity trusts, and limiting or eliminating valuation discounts for minority interests in entities. It is possible that the Super Committee may recommend these changes to become effective as early as November 23, 2011.

Although rumors of an immediate reduction in the Federal gift tax exemption are unsubstantiated and information on specific proposals of the Super Committee is not yet available, the possibility of such a reduction has been widely discussed by practitioners around the country. Therefore, we wanted to share this information with you in the event you or your clients are considering utilizing your $5 million Federal gift tax exemption. If you or your clients are considering making any gifts in 2011, it may be advisable to complete these gifts prior to November 23rd, if possible. Additionally, you may want to consider accelerating gifts that you otherwise planned to make in 2012 to avoid any potential impact from any Super Committee proposals.

Until Congress enacts a long-term extension or reformation of the current estate and gift tax system, the rumors and speculation will persist. Rather than add to the speculation about what might happen, we note the following points and opportunities that indicate now is a good time to take advantage of the current $5 million gift tax exemption:

•  Even without any legislative action, under current law the current $5 million exemption and 35% rate will revert at the end of 2012 to a $1 million exemption and a 55% rate.
•  In recent years, the Treasury Department has consistently recommended changes to substantially reduce the effectiveness of certain widely used planning techniques, including a significant reduction in the availability of valuation discounts applicable to transfers of limited partnership interests and other minority interests in family controlled entities, and an increase in the minimum term of grantor retained annuity trusts ("GRATs') from two to ten years.
• The benchmark interest rates that are required to be used in many estate planning transactions are at historically low levels. For example, the November rate used for GRATs is 1.4%, while the November rate for annual interest paid on a short term private loans is 0.19%.
• The current volatility in the financial markets may create favorable valuations of interests in closely-held entities for transfer tax purposes.

Many observers consider a sudden adverse change in legislation unlikely.  However it would be wise to remember that the legislation implementing the current favorable structure was enacted suddenly last December without any significant public discussion, and was not anticipated by many observers.  With the current emphasis on deficit reduction, it is plausible that Congress could very quickly enact legislation that would have substantial adverse impacts on the estate and gift taxes applicable to standard wealth-transfer techniques.