Better to Give

Amid all the tax uncertainty we’re facing I’ve noticed some specific suggestions of things you can do protect yourself that I thought I’d pass along.  One caveat is that this particular suggestions list is only good for people who are doing estate planning and have assets they can give now or later. 

The first set of suggestions involves planning for the worst and hoping for the best.  So the worst is that Congress doesn’t act on expiring tax provisions.  The top tax rate on capital gains jumps to 20 percent, and dividends will face a rate as high as 39.6 % up from 15% at maximum.  Next, you need to add the Medicare surtax that will kick in on investment income for high earning households.   If all this occurs in 2013, it would make sense to divest highly appreciated assets in 2012.   Waiting on Congress may mean making this decision while supposedly enjoying the week between Christmas and New Years.  The issue will be that you don’t want to be figuring out what assets are on the list and trying to do the transactions while everyone you will need to actually make this happen is on vacation.  (I’m sure your accountant will help you out regardless, but I can’t speak for your broker or attorney.)

So the suggestion is to build a plan of what would be divested, as well as when and how in doing your 2012 tax planning scenarios.  In the worst case you then are just sending an e-mail saying you are ready for the nuclear option.  While it’s not great – it’s better than the alternatives.

The other item to consider in all this is giving gifts below the gift tax threshold.  You can give up to $13,000 a year to anyone you want without hitting the gift tax. This benefit is not due to expire, and can be helpful in terms of the areas of estate taxes that are in flux.    In addition, the little gifts don’t count towards your per individual lifetime gift tax exemption.  (That stands at $5.12 million now and it’s due to drop to $1 million per person next year unless Congress takes action.)  The only caveats are that it really has to be a gift in that you have to part company with the assets.  In addition, if it’s hard to value, it should be appraised or there can be questions when settling the estate.  One other reason to consider gifts even if you don’t have a really large estate is that every state except Connecticut doesn’t tax gifts.  If that money stays in your estate, many states collect inheritance taxes at much lower thresholds than the Feds.