Dear Michael: Since the election, we've been wondering what things we might be doing to get ahead of the news coming down from Washington. What things would you suggest in light of the 'fiscal cliff', the end of tax laws at the end of the year, and four more years of the same administration? – Outvoted.
Dear Outvoted: I gather the election didn't go the way you wanted it to.
Well, first and foremost, we do know that the Health Law passed in 2010 has stood up to the Supreme Court tests. We now know a possible ouster via the election process is no longer possible, so the Affordable Health Care Act is the law of the land and we will see states rush to get ready for the impending laws the AHCA will bring about.
One little side note that many people forgot about the AHCA – which isn't going to make your day, either – is that on any income from capital gains, unearned incomes, stock and/or bonds interest, etc. over and above $250,000 per married couple ($125,000/single?) will have an additional four percent tax charged against it starting in 2013.
This effectively raises capital gains and other unearned income sources tax rates for those over $250,000 (including the income) another four percent. For example, capital gains – if they go to twenty percent in 2013 and if your income is over $250,000 – will now be taxed at twenty-four percent. The additional four percent taxes are to pay for AHCA. If you're thinking of selling, 2012 may be your year.
This will affect people with a lot of capital gains on sales of land, livestock, etc. etc. and it's a little forgotten piece about how we're going to pay for Affordable Health Care.
The second bit of 'good' news is there is a push to lower the Unified Credit from $5,000,000 per person to $3,500,000 per person. This will put close to twenty percent of all farmers and ranchers back into estate tax situations.
Up until year's end, you can gift property of up to $5,000,000 per spouse. However, if you were to gift, say, $2,500,000 in value today and the Unified Credit drops to $3,500,000 in 2013, you will only leave yourself with $1,000,000 of Unified Credit to use on the remainder of your estate at death.
If you are gifting property that is either depreciating or is likely to stay flat in value for years to come, you don't accomplish anything by doing such a gift. You'll just paint yourself into a corner in the future as to what you can and cannot do!
However, if you are gifting property that you feel fairly confident will rise in value for years to come (land, being the only example I can think of), why not move land out of your estate at it's current value today?
If I give five million dollars worth of land today and credits lower to $3,500,000, I've immediately shielded $1,500,000 from 35%-55% tax rates. I've also shielded any future growth on this asset, as well. So, if it grows to ten million by the time I die, it's out of my estate for estate tax purposes.
The really, really bad thing about this whole situation is the election just occurred, it's already the middle of November and with Thanksgiving and Christmas coming up, there are really only about three to three and a half 'business weeks' to make this life altering decision. I know a lot of people are going to push the panic button and make some stupid, crazy gifts before year's end for these reasons.
The only issue with a gift is this. Any gift you make should be considered like you would consider gambling money. In the same way you would never bet more than you can afford to lose, never, ever gift anything away that you might – and might in any sense of the word – need someday, Don't do it – you'll likely live to regret it.
If it's assets whereby you can be assured – and not just because you want to believe it's so, but because it IS so – will never, ever come back to bite you for having given it up – then by all means gift the assets away – as long as they meet the other criteria of future growth and not dropping in value later on. A gift is a gift is a gift – and once given, you cannot get it back. If you can live with that, then make the gift. If not, don't.
We have a bit of a financial tsunami coming our way right now. We may find that for all the good intentions of the current program, it might bring our country to an economic standstill or even a recession. We won't know the result of these changes for six months to a year. Until we jump into the deep end and tread water for a period of time, we won't know if we're in over our heads or not.
Secondly, in the war of taxes and estate planning, the planners of today and tomorrow don't yet know what they will be fighting and, therefore, don't have the tools yet to carry into the melee. But, rest assured; every time these issues have arisen in the past, new tools have been developed to give respite to those affected. We just haven't had enough time to see what we're facing nor how we will combat it – yet! We will.