It’s been said that nothing is sure in life except death and taxes. Perhaps changes in the tax code should be added to the list.
Come Jan. 1, 2013, the threshold at which an inheritance is taxed is set to drop. Currently, the applicable exclusion amount, or what you can leave on your passing tax-free is $5.12 million ($5 million plus $120,000 to adjust for inflation). Come January, that reverts to $1 million.
The estate tax of anything above the $5.12 million this year is 35 percent. It could go as high as 55 percent in January.
Creative planning could save millions of dollars. Brooke Borg, founder and attorney for Borg Law Group, gave an example.
“To simplify it, if someone has an estate valued at $6 million and gifts $5 million in 2012 and then passes away in 2013, $1 million of their estate will be taxed at 55 percent, which equals $550,000 in estate tax,” she said . “However, if this same person doesn’t choose to gift their $5 million until after they die, and they pass away in 2013, $5 million of their estate will be taxed at 55 percent, equaling $2.75 million due in estate tax. That’s a substantial loss that could have been avoided.”
Congress may address the rate between now and Dec. 31, but time is ticking.
Jim Smith of Summerlin, a retiree who owned a payroll services company, said he has no illusions of leaving behind an estate in excess of $1 million, but “That said, I view this decrease in the estate tax threshold as being directly and deliberately targeted at the ever-shrinking American middle class, who happen to own the majority of small businesses and family farms in our country.
“Our entire obscene tax code is nothing more than 100 years of special interests trying to gain financial or political privilege by spending billions of dollars on lobbyists. Small businesses cannot do that. Lowering the threshold to $1 million will force many small businesses and farms on death of the owner to sell simply in order to pay their inheritance taxes, prohibiting the heirs from continuing the business. Yet small business creates 65 percent of all new jobs in America. Further, this threshold decrease virtually eliminates the opportunity for increasing generational family wealth.
“And let’s face reality. A million dollars today will not go as far as it did a few years ago. Three years ago I could fill my old SUV with gas for $50. Today it costs $100.”
The approaching law has many people scrambling to change their financial structure by gifting assets to their heirs while they’re still alive.
Matt Swan, CPA with Swan and Gardiner, 9005 W. Sahara Ave., said that when his clients learn of the possible threshold change, their reaction is twofold.
First they respond with disbelief, he said, then, “Most of them ask, ‘If I gift away the $5 million this year, and then next year it goes to a million, do I have problems? Does that mean I’ve over- funded $4 million?’ The problem is, at least the last I’ve heard, there really isn’t an answer to that, but everyone is guessing that there will be no problem.”
He defined “problem” as being taxed on the $4 million that was gifted.
Adding an intended heir’s name to one’s bank account does not constitute a gift, nor is it a way around the gift tax because it would still be a part of one’s estate, Swan said.
He said as people’s personal situations change – divorce, children from multiple marriages – it is wise to update the status of estate planning. Unfortunately, estate planning is something many people put off.
David Straus, whose law offices are at 900 Rancho Lane, agreed.
“People generally leave more instructions when they go out on the town one night and leave their child with a baby sitter than when they leave the Earth forever,” he said.
When it comes to estate planning, Straus has the advantage of holding a juris doctorate along with a master’s in taxation. He is also a CPA. He’s done his own estate planning and tax planning, assuring that his two children, a daughter, 14, and son, 15, will have a secure inheritance.
For others, Straus focuses first on protecting the clients should they become disabled while they’re alive and protecting wealth from predators and law suits.
He said Nevada keeps passing laws favorable to families who want to pass on their wealth to heirs, noting that Nevada is in the Tier One category when it comes to protecting the assets of beneficiaries. For example, as of Oct. 1, 2011, Nevada passed legislation dealing with the cash value of life insurance and annuities, making them protected from creditors in many cases. A 2005 law allowed trusts to go 365 years, a generation-skipping trust, without incurring estate taxes. Before 2005, the law had been 90 years.
“Nothing is 100 percent bulletproof,” he said. “Asset protection, you’ve got to do it when you’re safe.”
“People say, ‘I’m too young to do a will or a trust,’ ” Borg said. “Well, no one’s promised a tomorrow.”
Some people may think they’d never get to the threshold of $1 million, especially in today’s tight economy with housing values so low. They forget they have other assets – life insurance, 401(k)s, IRAs, term insurance – beyond their home and bank account.
“Your money will go three places and three places only – the IRS, your heirs and charity,” Straus said. “Pick two … I don’t believe there should be an estate tax. I feel that most clients pay income tax on every dollar they have … I find this tax to be very unfair so we let our clients make a choice – do you want to … sell your children a lot of your assets and then have them have a charity or a foundation instead of the IRS and we do this all the time … You have a charity or a foundation in your name when you pass, and the IRS gets zero.”
Straus said it can’t work that simply for every client, there are other factors to consider, but if the threshold drops to $1 million, his office will be a lot busier.
Contact Summerlin/Summerlin South View reporter Jan Hogan at email@example.com or 387-2949