Senator Charles Schumer (D-N.Y.) was recently quoted stating, "The old style of tax reform is obsolete in a 2012 world." In 2013 taxes will increase with the expiration of the Bush tax cuts. Though this may not be front and center in the news or in the recent presidential debates, with the gift tax exemption rate plummeting from $5 million to $1 million and the maximum estate tax rate climbing to 55 percent at the end of the year, it seems worth noting.
By Jan. 1, 2013, not only will millions of people owe up to 20 percent more in estate taxes, but their options for asset protection will be significantly worse, as everything over $1 million will be subject to the highest rate of taxation. Succession planning strategies are not always front and center on people's radar. And even savvy investors have been known to procrastinate about this, because the inescapable future (you can't take it with you) must be formally addressed.
But not fully exploring your options before the end of 2012 could prove very costly. Investors want cost-effective strategies that allow them to keep more of their hard-earned money. However, it's highly unlikely that the average investor knows what all the options are, particularly with estate and succession planning. And it's absolutely bizarre that the forthcoming increased tax burden, right around the corner in 2013 and beyond, isn't being widely addressed.
Massive changes are ahead not only for high-net-worth individuals but for those who consider themselves members of the middle class. President Obama has stated on numerous occasions that he will not seek to renew these cuts. So, on Jan. 1, 2013, when the gift tax exemption amount falls from $5 million to $1 million for everyone, some will have a rude awakening, given the time required to design and execute proper estate planning measures.
So a game plan must be in the works now. If one is not, as 2013 begins and the Bush tax cuts are no more, investors will owe as much as 55 percent in estate taxes or pass that cost on to heirs. Even if a greater public dialogue were happening, there still would be no guarantee that Congress, which has the power to reverse President Obama's decision, would do so. And although estate planning is routine among the top earners in the country, the dramatic drop in the exemption amount from $5 million to $1 million (or $2 million for a married couple) affects the estate planning of everyone at or above this level.
The gift exemption will not be better next year, and is likely to be far worse. The best and simplest way to both legally reduce taxes and avoid double whammy of the scheduled tax increases is to review all assets and work with a professional to set up the necessary structures to protect your wealth now. It will cost the same amount, or less, to structure your assets this year versus later on. Why not do it now, when taxes are substantially lower? Your investments are almost certainly going to be worth up to 55-percent less on and after Jan. 1, 2013, so the time to act is now.
Steven Abernathy and Brian Luster co-founded The Abernathy Group II Family Office and the country's first Physician Family Office (PFO). The Abernathy Group Family Office sells no products, receives no commissions, and is independent, employee-owned, and governed by its Advisory Board comprised entirely of thought-leading professionals. Find them online at http://www.abernathygroupfamilyoffice.com.