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Client Alert: Year-End Estate and Income Tax Planning


Actions to consider before December 31, 2012 (subject to consultation with your advisors and potential Congressional action):

  • Make year end gifts
  • Accelerate income
  • Defer deductions
  • Review will and estate planning documents in light of pending changes
Estate and Wealth Transfer Planning
On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "2010 Legislation").  In addition to extending the so-called “Bush tax cuts”, the 2010 Legislation included a substantial increase in the amounts of wealth one can transfer during one’s lifetime without triggering the imposition of either current or future gift tax, estate tax, or generation-skipping transfer tax ("GST").
The 2010 Legislation by its own terms was only applicable for the years 2010 through 2012. As you know, Congress is currently deadlocked over proposed tax modifications.  If Congress fails to extend the 2010 Legislation, on January 1, 2013, the federal estate and gift tax exemptions will drop from $5.12 million to $1.0 million, the GST tax exemption will drop from $5.12 million to $1.39 million, plus an adjustment for 2012 inflation.  Moreover, the top marginal rate of estate, gift and GST tax will return to 55% from the current 35% rate.
As we noted in our client alert on December 9, 2011, under the Temporary Legislation, now is an exceptionally good time to make gift transfers.  This extremely favorable conflation of favorable interest rates, liberalized wealth transfer tax exemptions and low rates will end on December 31, 2012, unless Congress does something.
Accordingly, we remind you again that if you have any inclination whatsoever to make substantial gifts as part of your estate planning, the current window of opportunity represents an unparalleled opportunity to do so.  This is particularly important for couples with combined worth in excess of $10 million dollars or individuals with net worth in excess of $5 million.  Please contact us as soon as possible if you wish to implement any such transactions prior to the end of 2012. 
Planning for Higher Tax Rates
As noted above, unless Congress and the President act, on December 31, 2012, the so-called “Bush tax cuts” will expire.  Absent legislative action, virtually all taxpayers are looking at significantly increased tax rates beginning in 2013. 
For an extremely useful review and analysis of the issues that will result, we recommend to you the article "Planning for a Higher-Tax Environment,  Sunset Provisions, Medicare Taxes and Potential Strategies," distributed by UBS. 
Because of the coming shift from a “low tax rate” to a “high tax rate” environment, 2012 is a unique situation in terms of long-term tax planning opportunities.  This is the year when everything stands on its head -- accelerating income and deferring deductions may make sense for you.  This is particularly true because of the impact of the new Unearned Income Medicare Contribution tax, which appears in Section 1411 of the Code.  This extremely far-reaching tax of 3.8% will have huge ramifications on the relative values of investment returns starting in 2013. 

If we can assist with any of your year-end tax or business planning to address this changing environment, please do not hesitate to contact your regular attorney here at Morris, Manning & Martin or any member of our Tax Practice.