Dear Michael: We are approaching the end of the year and wonder if there are any things we should be doing prior to the end of the year. Should we be delaying income now or taking it for this year? Should we be making gifts of some sort to take advantage of the five million dollar gift exclusion? Anything else you can think of? – End of the Year
Dear End: Well, if we believed everything we have heard over the past year, we would have spent all of our money before the end of the Mayan calendar on December 21st. No sense in worrying about what the government is going to do if the world is going to come to an end. If you decide to spend it all before then, you might be just as well off than waiting to see what Congress comes up for you.
Seriously, I have never been so busy in my entire career as I have been the past few weeks answering phone calls regarding gifting, income taxes, meeting with clients CPA's, attorney's and adding my two cents to the mix. Every phone call takes twenty minutes and every meeting takes an hour or more.
From what I've picked up on sitting in on all these meetings is that it seems to be the consensus that if you don't have ten million dollars to give away and another ten million dollars to live on, it doesn't make a lot of sense to make gifts that may or may not exceed the future Unified Credit.
Of course, not knowing what that Unified Gift and Estate Tax Unified Credit is going to be in the future – say the next two to four years – it's a little hard to tell people what would make a good tax savings gift before the end of 2012. If you give away three and a half million dollars in assets today and the tax credit is three and a half million dollars next year and/or for years to come, you're going to be mad you gave up control over that amount of assets only to have the same net result by holding the assets.
Certain assets are good to give away even under these circumstances, though. If you have assets you can virtually guarantee will be worth much, much more in the next few years, they make a great gift. Such things might be developing mineral acres, land which might or may be commercially developed from it's current farm/ranch status, or any other assets that have a huge appreciable upside to them.
Bad things to give away would be anything that would be worth the same or even lose value in the future. I'd had many people ask me about gifting machinery. It's not a smart idea to give up a portion of your Unified Credit today for something that's going to be worth a lot less in the future. Your first year CPA will tell you that! Machinery, buildings, livestock, grain are all assets that are likely going to be worth less – or gradually disappear – in the future, so don't use a one-time gift using up your lifetime credit on transitory assets.
The other things I've been picking up in these endless meetings is that many CPA's are telling their clients if their future income is going to be roughly the same as it is in 2012 and is in excess of $200,000 single or $250,000 married, then it's probably the year to go cash in any pending sales, any deferred grain payments, insurance payments, land sales, etc.
The theory is that delaying income is only going to push this money into much, much higher tax brackets in the future. What you might believe is a high tax bracket today might seem cheap in the future. It's very possible we are going to have higher tax percentages on much lower brackets of income in years to come.
With everything up in the air, it's been more than a little frustrating trying to give people direction, help and perhaps a little solace in this situation when you're not even sure what the situation is. It's a little bit like guiding people out of a sinking ship – while you, yourself, are blindfolded!
Here's my sense of the situation coming.
One, things are going to be either a little or a lot more expensive for those people who earn an above average income. There's going to be higher costs for things like health insurance, income taxes, and many other things none of us can even dream of right now. Those of you who have accumulated property over lifetimes will have to spend more money on planning and/or for protection of your estate for the time being.
In other words, there's a hurricane headed towards shore and you're not going to get out of the scope of its path. Rather than run and hide, we need to face up and take it head on.
So, you might as well get ready and do the things necessary to protect your property for the time this particular hurricane takes (likely four to five years). You'll likely need to accept the fact there will be very few 'magic bullets' to get you out of the situation other than your own efforts to protect your own property.
Thank goodness we all come from a background where things weren't always easy, things weren't handed to us, and we know how to buckle down, button down, and do what we need to do without (too much) whining or complaining. For the time being, folks, it just is what it is and we'll just need to ride this out. Like every other era in the USA, this era, too, shall pass.