To love what you do and feel that it matters--how could anything be more fun?

― Katherine Graham


The New World of Estate Planning: Part 1

We are in a new world of planning. Yet, many have not integrated “the changes” into their thinking, planning, or actions.

The American Taxpayer Relief Act of 2012 (“ATRA”), signed into law January 2, 2013 has greatly contributed to the new world of planning. The vast majority of Americans will now be focused on income tax planning rather than estate tax/wealth transfer planning. Why? ATRA established a “permanent” (for the first time since 2000) Federal Estate Tax Exemption of $5 million per person, indexed for inflation. This year the Federal Estate Tax Exemption is $5.34 million or $10.68 million for a married couple. With moderate inflation, the original $5 million per person in 20 years will be $9,570,000 @ 3%, $11,690,000 @ 4%, and $14,140,000 @ 5%.

Note a married couple has two exemptions with which to plan and the definition of marriage has expanded.

Furthermore, portability of the Federal Estate Tax Exemption within a married couple is now “permanent.” Today there is substantial uncertainty and disagreement over how to best utilize the Deceased Spouse Unused Exemption (“DSUE”) Amount. (This will be the topic of a future memo.)

ATRA decreased the recent maximum Federal Estate Tax rate of 55% to 40%.

A decade ago the rate differential between the top estate tax rate and top income tax/capital gain rate was significant. We were less concerned about minimizing income taxes on assets passed to loved ones during lifetime than we were about reducing estate taxes on post-death asset transfers. The “maxim” was “when in doubt, transfer the assets out.”

In our new world ATRA dramatically increased income tax rates for high income earners and added many “twists” to income tax calculations.

For example:

• We have the combination of a 13% increase of the maximum federal income tax rate (35% to 39.6%) and the addition of the 3.8% Net Income Investment Tax which has already “surprised” many taxpayers.
 
• Ordinary income and short-term capital gains increased 24% (35% to 43.4%).

• Long term capital gains increased 59% (15% to 23.8%).

• Let us not forget the .9% Medicare Surtax on “high wages.”

Add in state and local taxes & taxpayers can become minority shareholders of their income. This is no joke.

As above illustrated, the rate differential between the top estate tax rate and top income tax/capital gain rate is much closer than it has been in the past.

In 2014 and beyond the guiding principle might be: “Do not make lifetime transfers, rather die owning appreciated assets to take advantage of basis step up at death.” (Of course there are many non-tax reasons for making gifts.)

Clients who are no longer concerned about estate taxes may also need to look at income tax planning in new ways.

The sale of even one asset may bring a normally lower income tax bracket taxpayer into a higher income tax bracket, create the loss of deductions for the normally lower bracket taxpayer, and bring on the new 3.8% Net Income Investment Tax. This would not be a nice surprise for anyone!

We also have a new world of planning beyond estate tax planning and income tax planning:

• Clients are living longer today. They are afraid of outliving their money. Those who are working are concerned about job security. Business owners are worried about profitability and business exit strategies. Many clients are concerned about seemingly ever-increasing expenses. This in turn may leave less for clients to pass on to their loved ones.

• Clients fear their children and younger generations will not have the same lifestyle and financial security as they have enjoyed. How many kids today graduate from college, have huge student debt, and cannot find jobs? What happens to kids who do not attend college?

• Many clients are caring for parents and other relatives in need. This has its monetary and non-monetary costs. How do they handle this?

• Clients continue to be concerned about divorce and predator protection for themselves and their loved ones. This is especially true in a volatile economy.

• Clients want to pass their values as well as the value of their assets to their children, grandchildren, and other loved ones.

• Clients want to leave a legacy.

What does this mean?

We, as clients and as professional advisors, have to work together in different ways to address current and evolving issues. We have to keep a closer eye on each of our situations. We, as clients, have to communicate with the collaborative planning team. Collaborative planning team members need to communicate well with each other and with clients. (The team may include one or more of the following: accountant(s), attorney(s), business advisor, financial advisor, insurance advisor(s), and trust officer. Note I am a client of my personal collaborative planning team and I am a collaborative team member for my clients.) Information, thoughts, and feelings need to result in appropriate and timely action. We, as clients and as professional advisors, have to change our focus and we have to be more proactive. This also means opportunities to do wonderful things for ourselves, our loved ones, our clients, and our communities.

This information was prepared by Lena Barnett & Associates, LLC and is intended only to provide general information.
It is neither offered nor intended for use as legal advice, nor is it a substitute for a consultation with an attorney.

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