Top income earners are scrambling to take advantage of estate and gift tax rates before the Bush-era tax cuts end and the Affordable Care Act income tax increases take effect.
“There”™s a little bit of a perfect storm here,” said Nicholas Bertha, director of wealth and trust planning at Fieldpoint Private.
Many wealthy families are choosing to bestow portions of their wealth or businesses to their children now, as there likely won”™t be as profitable an opportunity again in their lifetimes.
“That”™s why we”™re so avid about reaching out to our client base so they can take advantage of a 100-year storm,” Bertha said. “This doesn”™t happen very often.”
Under the Bush-era tax cuts, only gifts and estate transfers more than $5.1 million are taxed and at a rate of 35 percent. The cuts are due to expire in January 2013, and unless a new deal is reached in Congress with President Obama”™s approval, the rate will return to pre-2001 limitations of gifts more than $1 million, taxed at 55 percent.
This means that if a family were to give their child a gift of $5 million in a trust, in 20 years, under the right circumstances, it could be worth $13 million after taxes. If they were to wait to give their inheritance through their estate after death, the amount after taxes would be worth between $6 million and $7 million.
Additionally, with the value of assets currently depressed from the recession, the benefits of giving a gift now continue. The gift would be taxed at a lower value than it is actually worth. That value will eventually increase, Bertha said, meaning paying taxes on it now means paying less in total down the road.
But with a limited timeframe to make these gifts, there”™s a professional concern that there will be a “planning tsunami” where all the pieces to families”™ plans may not come together correctly.
Each month Bertha said he”™s seen the interest in taking advantage of current gifting rates swell. As a result, there”™s already a backlog of work to be done. The estimated time to receive an appraisal in the area has increased from two weeks to eight, said attorney Jennifer Port at Ivey, Barnum & O”™Mara L.L.C., in Greenwich. The office has eight estate planning lawyers and each is dealing with clients considering or in the process of making a gift.
“Gifting is what people are thinking about; it just takes time to find the right asset,” Port said. “People are asking, ”˜Is this a once”“in”“a”“lifetime opportunity that I”™m passing by? And if it is, what do I do to take advantage of it?”™
“For some, if you look at the numbers, this is a home run,” she said.
But gifting isn”™t the only thing bankers and CPAs are hearing about. The Affordable Care Act (ACA) has placed a new tax on investment incomes as well. Currently there”™s a 15 percent tax on net investment income, but if it resumes to pre-2001 levels, dividends will be taxed at 39.6 percent, capital gains at 20 percent, plus an additional 3.8 percent on each with the ACA.
The tax will apply to the top 2 percent of income earners or families earning more than $250,000 a year.
“It”™s just coming on to many of our clients”™ radar,” Bertha said. “It”™s a little bit of a game changer.”
High earners are looking to change their stock portfolios from high”“dividend payouts to stocks with slower growing capital gains. Additionally they”™re looking into better bond payouts after taxes.
“The problem is, you can”™t commit to too much before you know what is going to happen,” Bertha said, reflecting on the unknown state of income taxes for high earners. “But doing strategic stuff back in the laboratory (helps).”
