THE BLOG
12/18/2013 10:04 am ET | Updated Feb 17, 2014

Planning Now: Back to the Basics

After the presidential election of 2012, Americans anticipated major changes in income, estate and gift tax rules. Many feared the unified estate and gift tax exclusion, which had been just over $5 million per person, would drop to as low as perhaps $1 million. Capital gains rates were slated to increase and include surtaxes for payrolls and universal healthcare.

Potentially closing a substantial wealth transfer opportunity spurred a rash of end-of-year trust and insurance planning, valuation work and gifting in order to diminish potential tax liabilities.

Higher future capital gains taxes accelerated the realization of gains whether through the outright sale of closely held and publicly-traded businesses, sales of assets to trusts or merely selling appreciated portfolio holdings.

What actually transpired was that the per capita gift and estate tax exclusions have been maintained -- and even indexed for inflation -- and now stand at $5.25 million for 2013, rising to $5.34 million in 2014. Capital gains rates did increase and the surtaxes are in place, so the top federal tax rate on long-term capital gains has increased from 15 percent to 23.8 percent.

So, the big question for year-end 2013 is, "What opportunities are there now?" Has one missed the boat?

The short answer is that many of the same time-tested strategies are still attractive, but if you have been sitting on the sidelines, perhaps now is the time to simply get back to basics.

To that end, here are five tax and financial planning moves to employ now:

1. Update your estate planning documents. This is straightforward, but often overlooked. In light of tax changes and life events, keeping the following documents current is just sensible long-term planning:

A. Will: This governs the disposition of property, identifies specific gifts and outlines methods to divide assets. In the will, you appoint executors of the estate, and if you have minor children, appoint their guardians as well.

B. Healthcare proxy: This delegated power is for another to make medical decisions on your behalf in case of incapacity. Whether to provide life-sustaining treatment or donate organs are contemplated.

C. Durable power of attorney for property: This delegated power is for another to manage your business and contractual affairs in case of incapacity.

D. Revocable living trust: This Trust is established to avoid the probate process (a public court-led airing of estate matters). Principal and substitute trustees must be named, as well as the terms of the trust.

2. Transfer wealth to future generations. If your taxable estate is over $5.25MM, consider transferring some wealth to beneficiaries as early as possible. If non-excluded assets will ultimately be taxed at 50 percent or higher inside the estate, allowing those assets to grow outside of the estate is beneficial. In addition, if structured properly inside grantor trusts, the capital gains and income taxes from the growth of assets is paid by the grantor, thereby further reducing the taxable estate.

3. Make creative use of annual gift exclusions. These annual amounts (currently $14,000 and indexed for inflation) can be given to any beneficiary, and do not reduce the lifetime ($5.25MM) amount. Cash can be gifted to college savings plans or toward insurance premiums (both tax-advantaged investments), in trust or outright. Assets can be transferred in $14,000 increments, and if properly planned, discounting can be used to get more value transferred.

4. Fund retirement and college savings accounts and insurance policies. Tax rates are higher, so make use of the government's interest-free loans in these vehicles. All the income and gains will accumulate tax-deferred or tax-free.

5. Realize bond losses to offset stock gains. Global markets have rallied substantially over the past few years, creating a potential capital gains tax burden. On the other hand, many bond funds and securities have lost value. If you have not already, now is a good time to rotate bond investments to be shorter duration and more credit-sensitive fixed income strategies.

Tax and estate laws have changed and are likely to change again with little notice. Now is the time to insure one's planning documents are up to date and flexible, and to execute on the basic strategies to save and grow wealth today and in the future.