CPAs have an unprecedented opportunity to demonstrate their value in the following ways before the end of 2012, when the Bush-era tax cuts are set to expire, estate and gift tax exemptions are scheduled to shrink back to $1 million, and current proposals could diminish the planning advantages of grantor and dynasty trusts.
Don’t make the mistake of thinking this is a repeat of 2010, when the Bush-era tax breaks were extended, and therefore do no planning. The story and the players are different in 2012, so the ending may be different as well.
Devise a game plan now that you are prepared to put into action, if necessary, at year end. It will take time to educate clients on the impact and get them to buy into a plan; have attorneys draft documents early and have valuations prepared, if necessary.
Determine whether clients should make gifts now to use the $5 million gift exemption that may revert to $1 million in 2013. This may be the last opportunity for clients to save a significant amount in federal and state estate and gift tax.
Plan to implement grantor retained annuity trusts (GRATs), if they make sense for your clients, since their benefits could be curtailed. President Barack Obama has proposed limiting the minimum GRAT term to 10 years and eliminating the zeroed-out GRAT option.
Plan for a potential change in estate and income treatment of grantor trusts. Obama’s proposals also would include grantor trust assets in taxable estates and gifts and impose tax on trust distributions.
Don’t overlook possible changes for generation-skipping transfers. Another proposal would limit the duration of the GST tax exemption to 90 years, thereby reducing the value of dynasty trusts.
Be ready to accelerate income and defer expenses based on what transpires at year end. Significant savings may be possible if tax rates jump in 2013, coupled with the new 3.8% Medicare surtax on investment income. Types of income that will be subject to the surtax include taxable interest, dividends, annuity income, passive royalties, and rents. Consider shifting this income into 2012 and/or implement strategies to reduce net investment income and modified adjusted gross income in 2013 and forward. Look at income acceleration strategies such as gain harvesting, Roth conversions, and retirement distributions.
Consider accelerating itemized deductions into 2012. Itemized deductions may once again be limited in 2013, so accelerating these deductions into 2012 may be prudent.
Assess whether investment portfolios should be reallocated. It may make sense to shift assets between qualified and nonqualified accounts and rethink asset allocation (i.e., growth vs. income stocks, muni bonds, etc.).
Run projections that demonstrate to clients how much they can save. Illustrate the impact that proper planning can make on the scenarios that may transpire at year end.
For more, see the archive of an AICPA Personal Financial Planning webinar, “Proactive Planning in Preparation for 2013,” at aicpa.org/PFP/proactiveplanning.
—By Ted Sarenski, CPA/PFS, CFP, AEP, (firstname.lastname@example.org) president and founder of Blue Ocean Strategic Capital LLC in Syracuse, N.Y. He is chairman of the AICPA Personal Financial Planning Executive Committee’s Elder Planning Task Force and sits on the AICPA Advanced Personal Financial Planning Conference and Financial Literacy Commission.