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Tax Planning Opportunities for High Net Worth Individuals

Despite the election results, taxes are going up!  Although major tax law changes are set to take place in 2013, there are opportunities for high net worth individuals. Below are a few planning opportunities.

Tax Provisions Which May Impact Planning Opportunities

■       Medicare surtax.

■       Long term capital gains tax rate rising.

■       Federal estate tax exemption decreasing and rates rising.

■       Federal gift tax exemption decreasing and rates rising.

■       Federal generation skipping transfer tax exemption decreasing and rate rising.

Planning Opportunities

■       Individuals who may desire to diversify out of any long term stock or real estate holdings should consider selling and realizing any gain on those holdings before year end to take advantage of the lower long term capital gains tax rate in effect this year, and to avoid the potential Medicare surtax to the extent capital gains on such holdings will be includible in net investment income.

■       Individuals may consider gifting vacation homes or family compounds to utilize all or portions of the larger gift and GST tax exemptions currently available under the 2010 Tax Act.  Gifts may be made outright or using a variety of trusts (such as SLATs, IDITs, and/or dynasty trusts) to keep the valued family real estate intact for the family.

■       Individuals may consider naming tax exempt charitable organizations as beneficiaries of their qualified accounts and IRAs, the balances of which would be includible in an individual’s taxable estate and income taxable to any individual who might otherwise be named beneficiaries of those accounts.  With the use of the larger gift and GST tax exemptions currently available under the 2010 Tax Act, these individuals may more easily establish and fund wealth replacement trusts for children and grandchildren and have the trust purchase permanent life insurance, the death benefit of which in comparison would pass income and estate tax free to the children and grandchildren as beneficiaries of the trust.

■       Individuals may consider gifting larger blocks of undivided interests in appreciating real estate with valuation

discounts in trust for the benefit of the individual’s spouse (a SLAT) and future generations using the additional gift                and GST tax exemptions currently available under the 2010 Tax Act.

■       Clients with significant qualified plan and IRA balances should review the potential income tax and Medicare surtax advantages of Roth conversions in 2012 because:

  • Although distributions from qualified plans and IRAs will not be includible in net investment income for Medicare surtax purposes, taxable distributions from qualified plans and IRAs will be includible and increase a taxpayer’s modified adjusted gross income for Medicare surtax purposes in the years taxable distributions are taken;
  • For Roth conversions after 2012, the conversion income will be includible in and increase a taxpayer’s modified adjusted gross income for Medicare surtax purposes in the year of conversion; and
  • Nontaxable distributions from Roth IRAs taken after 2012 will not be includible in a taxpayer’s modified adjusted gross income for Medicare surtax.

Our tax law firm is helping clients aggressively plan for the future. Contact us for a consultation.