So far, we’ve looked at why the tax landscape is changing (the government needs to stop the bleeding), and what these specific changes are (tax increases, exemption decreases).
Now let's turn our focus to how some high net worth families are navigating through these changes. Keep in mind that this planning presumes that Congress will not act to legislate against the pending changes and these changes will, in fact, take place.
- Gifting – Act now. Utilize some or all of the current $5,120,000 lifetime exemption before it gets reduced to $1,000,000 to move assets out of your estate. Don’t trust your children or grandchildren with their newly-acquired wealth? Some high net worth families are reducing their estates by establishing trusts and other legal entities that facilitate generational wealth transfers while ensuring that the funds gifted are not immediately accessed. Some of these include a Lifetime Family Access Gift Trust or Family Limited Partnerships.
- Taking Capital Gains – Taking advantage of the current maximum long-term capital gains rate of 15%, some investors are selling long-term equity positions now that have appreciated in value. Sooner may be better than later, as there could potentially be a huge sell-off late in the year. Might be the time to sell some low basis stock that you purchased near the bottom of the market in 2009.
If Congress enacts new legislation to hold onto the current rates and exemptions because of the stalled economy, all this planning may be unnecessary. But no one can predict one way or the other, so the best we can do is plan for what we know now.
Robert A. Connell is CEO of Apex Financial Advisors, Inc.