October 18, 2012 – Crucial 2013 Income and Other Tax Planning Considerations


We welcome individuals to submit contributions for future Thursday Report topics. If you are interested in making a contribution as a guest writer please email Janine Ruggiero at Janine@gassmanpa.com


2012 will be a historic year for both the United States and tax planners.

We are today sitting at the cusp of one of the greatest income and estate tax increase events ever legislated, as the result of the December 31, 2012 scheduled closure of both the Bush 2001 tax cuts and the Obama/Republican compromises and legislative mis-mash that resulted in no estate tax for those “fortunate” enough to die in 2010 and a $5,000,000 and then $5,120,000 gift and estate exclusion for 2011 and 2012 along with portability to apply where a spouse dies without using his or her entire $5,120,000 allowance, and the unprecedented extension of unemployment benefits along with a reduction of employee paid employment taxes from 6.2% to 4.2%.

What a storm that we have been navigating, and for the wealthy we have only until December 31stto make major moves that can enable precious assets to be brought to safe shore before the tsunami of estate, gift, income, and the new Medicare tax are scheduled to hit.

Of course, what actually happens will depend upon which party places its presidential contender in office and reaches majority control in the House and/or the Senate.  There are many close races, and an urgent need for the parties to work together after the election to assure fiscal sanity and predictably for financial markets and income earners.

We see 4 main possibilities that may occur as the result of the elections and a continually challenged economy and budgetary situation for the U.S.:

1. A Democratic Party Sweep.  Barack Obama and Democratic candidates in the House and Senate have substantial success in the elections and are able to bring the estate tax to a $3,500,000 per person exemption on death and possibly only a $1,000,000 lifetime gifting exemption, along with income tax hikes and the 3.8% Medicare Tax hits for those able to earn $250,000 or more (or $200,000 if they are single).

2. A Republican Party Sweep.  Mitt Romney and the Republican candidates for the House and Senate enjoy a significant victory and are able to roll all Bush tax cuts and the $5,120,000 estate and gift tax exemptions going forward to the relief of the wealthy and those who believe that the monies that would otherwise be taken in taxes should be left in the economy to enhance the chances of economic recovery, notwithstanding significant debt.

3. No Sweep but the Parties Work Out Their Differences.  The election is close and we have a situation where it will take cooperation between significant numbers of Democrats and Republicans to make changes to the tax system.

Even as difficult as it has been to have Democrats and Republicans work together in the past 4 years, there must be some degree of support for the proposition that the public is sick and tired of watching our political process cause tax and financial uncertainty for both middle and upper class voters.

Even the President and the members of the House and the Senate who were in office in late 2009 were able to put together the compromise package that brought about the 2-year $5,120,000 compromise that continued the Bush tax cuts and unemployment benefits while enabling the 2% employment tax reduction that we are now enjoying.

4. No Sweep and the Parties Do Not Work Out Their Differences.  Alternatively, there may be legislative deadlock and no significant compromise so that wealthy and successful taxpayers find themselves unable to continue to pass significant wealth onto family members as easily as they have been able to in 2011 and 2012, and a harsh reality of significantly higher income tax rates will have to be faced and lived with.

The Tricks:

What do we tell clients in the meantime, besides be flexible and call me after November 11th, when at least some of the tea leaves will be in formation?

1. Complete use of the $5,120,000 gift allowance in whatever form possible, and keep in mind that valuation discounts may not be available after 2012 based upon the Obama proposals.

2. Consider the use of GRATs, which may also not be around in their present form after 2012.

3. Make your hard decisions about whether the client is financially comfortable placing assets permanently outside of his or her use and benefit or whether a trust with discretionary benefits for the Grantor should be established in a creditor protection jurisdiction and possibly modified a few years up the road when more information is available.

4. Use formula transfer clauses or formula remainder to charity clauses both in transfer documents and in trust agreements as and when possible before these are legislated out of existence.

5. Be ready to unplug great-grandpa or get him married fast to your favorite aunt.

6. Installment sales using low interest notes could be the play of the century where a grandfathered defective grantor trust is involved.

7. Take Capital Gains Now. If you have thought about doing a transaction that might trigger capital gains, get it done! 15% is a heck of a lot lower than 20% or 23.8%.

This can go beyond traditional sale transactions. For example, a professional who owns his or her own C Corporation and has been thinking about moving the practice to a new S Corporation might want to do this before year-end so that if there are inadvertent capital gains from the possible transfer of goodwill from the C Corporation, they will be taxed at 15% instead of a possible 23.8%.

8. Also, if it seems most likely that ordinary income will be taxed at 39.6% as opposed to 35%, why not trigger more income for 2012 by having operating companies factor or otherwise transfer their accounts receivable in order to trigger gain if they are on the cash method of accounting. A 4.6% reduction in the tax rate constitutes a 11.62% tax savings, which may certainly be worthwhile.

And if this happens in a C Corporation that will distribute the monies to key shareholders as compensation subject to the extra .9% employee’s share tax, the savings is based on a 5.5% reduction in tax rate constitutes a tax savings of 13.58%.

9. Year end planning. Prior practices that involve paying as much in expenses as possible and delaying the active collection of accounts receivable may be reversed by taxpayers who want to maximize income in 2012 to reduce what they will pay at higher rates in 2013. So get those accounts receivable in and deposited and pay expenses in the normal course for December if rates are going up.

It might also be best to put off paying real estate taxes until 2013, and to delay charitable contributions as well. Next year appreciated investment assets that a client is not inclined to sell this year may be best held under a long term charitable remainder trust that can pay 90% of its overall value to the Grantor and facilitate charitable contribution deductions and deferral of tax on the sale of the investment.

10. Electing Fiscal Years for Estates and for Revocable Trusts where the Grantor has died, or for New Complex Trusts or C Corporations. A fiscal year ending in November 30, 2013 should be taxed under the 2012 rates, and may result in avoidance of the 3.8% Medicare Tax for beneficiaries who would otherwise be subject to this for income distributed up through November 30, 2013.

While it would be most efficient to wait until we know or can better guess which of the above four possible events will occur, we will only have approximately seven weeks when election results come in (assuming that the election does not have to be decided by the U.S. Supreme Court like it was in 2004), which will not be enough time for the vast majority of advisors to get with the majority of their clients, given other challenges that already exist for year-end planning under most scenarios.

11. Fortunately, most investment decisions can wait until 2013, although the financial services industry will doubtless do its best to make sure that clients and potential clients are well prepared to make investment changes.

On the other hand, clients who know that they are in the highest brackets and will have the need for cash to be withdrawn from variable annuities, IRA’s and non-college use 529 plans can consider making extra withdrawals in 2012 in order to reduce what they will need to withdraw in  2013.

12. Budget, Budget, Budget. A good many clients will have to reduce expenses to a great extent in order to make ends meet if taxes rise and income cannot increase sufficiently to offset this.

Clients can be encouraged to put off large expenses and committments and to begin thinking about how they can reduce their expenses and business and personal overhead in order to enhance personal savings or reduce the need to earn beyond their comfort zone whether or not the tax increases come out as high as they may.

13. Complex trusts may become more popular than defective grantor trusts where beneficiaries are in a lower income tax bracket.  Consider using multiple trusts so that one or more can be defective and one or more can be complex.  The complex trust can give each beneficiary enough income to bring him or her up to the higher brackets in order to make use of the lower brackets.

14. If the Democratic Party takes a sweep, then “Estate Tax Planning for Those Who Hoped They Would Never Need It” will be en vogue for anyone who may leave more than $1,000,000 –but could that really happen?  We think a $3,500,000 exemption, reduced by prior reportable gifting, would be a reasonable worst case scenario unless there is absolute deadlock.

This would take us back to funding irrevocable life insurance trusts and engaging in more aggressive annual gifting situations.  The gift tax allowance should be $14,000 per person per year next year.

15. If the estate tax goes away, then there is time to concentrate on things like:

  1.  Fine-tuning inheritance planning.
  2.  Elective share planning.
  3.  Homestead planning.
  4.  Trying to make children self-sufficient.
  5.  Creditor protection planning

16. Marry a trophy spouse with big NOLs (net operating losses), who is a real estate professional (if you own rental property) who has never used his or her $5,120,000 exemption, is self supporting, doesn’t have children by a prior marriage, and has few assets that would reduce portability benefits.

17. Consider delaying charitable contributions to 2013 when the government will subsidize them to a much greater degree based upon a 39.6% tax rate and possible reduction of the 3.8% Medicare tax for charitable donors.

Charitable remainder trusts may also avoid the 3.8% Medicare tax next year.

18. A list of 34 possible income tax strategies from our book The Essential Estate Planning Guide to the 2013 Income & Estate Tax Increases is as follows:

Planning Tip #1   Be prepared for the marriage penalty in 2013

Planning Tip #2   It may be best to trigger or receive income in 2012

Planning Tip #3   Marry someone who has large capital loss carryforwards

Planning Tip #4   Marry someone with large net operating losses (NOLs)

Planning Tip #5   Invest in the following tax advantaged vehicles

Planning Tip #6   Maximize the use of the standard deduction

Planning Tip #7   Defer receiving Social Security benefits

Planning Tip #8   Taxpayers can reduce their wages below the applicable threshold

Planning Tip #9   Companies that hire non resident aliens as employees avoid paying U.S. FICA and Medicare taxes

Planning Tip #10   To reduce self employment taxes and liability exposure, self employed taxpayers should consider forming a corporation or LLC

Planning Tip #11   Sell appreciated capital assets

Planning Tip #12   Contribute the maximum amount to retirement accounts

Planning Tip #13   Convert traditional IRAs to a Roth IRA

Planning Tip #14   Contribute to deferred compensation plans

Planning Tip #15   Invest in qualified annuities

Planning Tip #16   Invest in life insurance policies

Planning Tip #17   Invest in oil and working gas interests

Planning Tip #18   Invest in tax exempt bonds

Planning Tip #19   Transfer appreciated assets to a Charitable Remainder Trust (CRT)

Planning Tip #20   Convert passive real estate activities into active interests

Planning Tip #21   Convert C corporations to S corporations

Planning Tip #22   Materially participate in your S corporation or partnership to avoid the 3.8% Medicare tax

Planning Tip #23   To avoid the 3.8% Medicare contribution tax on rental income, investors should consider converting triple net lease arrangements

Planning Tip #24   Defer payments of medical expenses to 2013 to exceed the new 10% AGI limitations

Planning Tip #25   Make your parents or other elderly people who you help support dependents

Planning Tip #26   Defer charitable contributions to 2013 to increase the tax benefit

Planning Tip #27   Purchase qualified property in 2012 up to the maximum Section 179 limit before the deduction limit is drastically reduced in 2013

Planning Tip #28   It is possible to structure a partnership so that certain partners are taxed more than others

Planning Tip #29   Elderly people with highly appreciated assets may be best advised to simply hold on to these assets

Planning Tip #30  Pay most of the deductible expenses for an estate in the same year that the remaining estate assets are distributed

Planning Tip #31   High earner taxpayers may consider placing capital gains producing investments into simple trusts

Planning Tip #32   Maximize the election under Code 663(b) to treat distributions made in the first 65 days in 2013 as 2012 distributions

Planning Tip #33  Establish a Charitable Remainder Trust

Planning Tip #34   To avoid the 3.8% Medicare tax on oil and gas working interests convert limited partnership interests to general partnership interests

 The Traps:

Be prepared for the worst, don’t wait until it is too late to advise your clients of some money-saving moves.

Please consider purchasing the book, The Essential Planning Guide to the 2013 Income & Estate Tax Increases by Alan Gassman, J.D., L.L.M. and Erica Pless, J.D., L.L.M. to learn more about this topic.   The book can be purchased by visiting our Amazon page at http://www.amazon.com/Essential-Planning-Income-Estate-Increases/dp/0985149418/ref=sr_1_1?ie=UTF8&qid=1350488975&sr=8-1&keywords=alan+gassman


We are providing this month’s, last month’s, and the preceding month’s Applicable Federal Rates, because for a sale you can use the lowest of the 3.  To view the chart please click here.


Alan S. Gassman, Esq. spoke at the The Tampa Bay Research Institute, Inc. 2nd Annual Estate Planning Seminar, in partnership with the Pinellas Community Foundation.  Alan Gassman’s topic was Trust Planning for 2013 and Beyond – How to Keep Wealth in the Family.  To request a copy of the outline used for this presentation please email Janine Ruggiero at Janine@gassmanpa.com

THURSDAY, OCTOBER 18, 2012 12:30 p.m. – 2:00 p.m.
Professor Jerry Hesch, Alan Gassman, Esq. and Christopher Denicolo, Esq. will be speaking on a Bloomberg BNA webinar entitled Interesting Interest: Interest Rates for Intra-Family Transactions. To register please visit http://www.bna.com/interesting-interest-interest-w17179869894/.  If you are unable to attend the webinar and would like to receive a complimentary copy of the PowerPoint presentation please email Janine Ruggiero at Janine@gassmanpa.com

THURSDAY, OCTOBER 25, 2012, 4:00 p.m. – 4:50 p.m. 
Please join us for The 4-4-4 Show, a monthly Clearwater Bar Association continuing education webinar series that qualifies for 1 hour of continuing education credit and is moderated by Alan S. Gassman, Esq.  This month’s topic is “Lawyer Ethics in a Digital World: Hot Topics and Important Tips on How to Survive!” with well known expert Joe Corsmeier, Esquire.  To register please visit:www.clearwaterbar.org

 TUESDAY, OCTOBER 30, 2012 12:30 pm – 2:00 pm  
Alan S. Gassman, J.D., LL.M., Kenneth J. Crotty, J.D., LL.M. and Christopher J. Denicolo, J.D., LL.M. will be speaking on a Bloomberg BNA webinar entitled Year-End Tax Planning: Do’s and Don’ts for Estate Tax Planners.  To register please visit: http://www.bna.com/yearend-tax-planning-w17179870140/.  If you are unable to attend the webinar and would like to receive a complimentary copy of the PowerPoint presentation please email Janine Ruggiero at Janine@gassmanpa.com

MONDAY, NOVEMBER 5, 2012 12:30 pm – 1:00 pm
Please join us for Lunch Talk, a free monthly webinar series from the Clearwater Bar Association.  This month’s topic is What Lawyers Need to Know About Surveys – How to Read Them and What to Check with guest speaker David Brittain.  To register for the webinar please visit: www.clearwaterbar.org

Christopher Denicolo, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law.  He has co-authored several handbooks that have been featured in Bloomberg BNA Tax & Accounting, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters and the Florida Bar Journal.  is also the author of the Federal Income Taxation of the Business Entity Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition Mr. Denicolo received his B.A. and B.S. degrees from Florida State University, his J.D. from Stetson University College of Law and his LL.M. (Estate Planning) from the University of Miami.

Kenneth J. Crotty, J.D., LL.M., is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. Mr. Crotty has co-authored several handbooks that have been published in BNA Tax & Accounting, Estate Planning, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, Estate Planning magazine, and Practial Tax Strategies.  Mr. Crotty is also the author of the Limited Liability Company Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. He, Alan Gassman and Christopher Denicolo are the co-authors of the BNA book Estate Tax Planning in 2011 & 2012. His email address is ken@gassmanpa.com.

Thank you to our law clerks that assisted us in preparing this report:

Kacie Hohnadell is a third-year law student at Stetson University College of Law and is considering pursuing an LL.M. in taxation upon graduation. Kacie is also the Executive Editor of Stetson Law Review and is actively involved in Stetson’s chapter of the Student Animal Legal Defense Fund. In 2010, she received her B.A. from the University of Central Florida in Advertising and Public Relations with a minor in Marketing, and moved to St. Petersburg shortly after graduation to pursue her Juris Doctor. Her email address is Kacie@gassmanpa.com.

Alexandra Fugate earned her B.A. in English from the University of Florida in 2008, and J.D. from Stetson University College of Law in 2012. She has been a Guardian ad Litem for the past two years, a judicial intern for the Twelfth Circuit in Bradenton, and was recently admitted to the Florida Bar. She wants to pursue a career in business, employment, and labor law. Her email is Alexandra@gassmanpa.com

Eric Moody is a third-year law student, scheduled to graduate in December 2012, at Stetson University College of Law and is considering pursuing an LLM in estate planning upon graduation. Eric is also an Articles and Symposia Editor for Stetson Law Review. In 2009, Eric received a B.S. in Business Management from the University of South Florida. Eric’s email address is Eric@gassmanpa.com.