December 13, 2013

Have you adjusted your estate planning, investment and tax strategies to take advantage (or not hurt yourself) in light of the new tax rates? Higher income earners can potentially be in the 39.6%, and may have an additional 3.8% Medicare surtax on investment income to be in the 43.4% tax-bracket. Also, the highest estate tax rate has risen to 40% on the Federal side (not including state estate taxes). Here are some tax tips for real estate developers:

What does this mean to you?

With different tax treatment for earned income, investment income and capital gains, it’s become imperative to look at your income and investments in a different way. Many people have heard of the term “rebalancing the assets in their portfolio”, but with the new higher tax rates it now makes sense to rebalance your assets for estate and income tax purposes.

Here are a few tips for rebalancing your estate planning and tax planning strategies:

  • Does it make sense to work over 500 hours per year in your business, so your income is earned income versus investment income? Investment income is subject to an additional 3.8% surtax.
  • Should you adjust your partnership distributions higher since non-active partners may be subject to higher tax rates than active partners?
  • Spending/Inheritance strategy. With new higher tax rates, it may make sense to change your estate plan. It’s time to look at your assets in different buckets and determine which assets you should spend down during your lifetime and which are best to leave to your heirs. Not all assets are created equal; e.g., many traditional IRA’s have a potential estate tax plus income tax burden when they pass on to heirs. Many assets, such as real estate, are subject to step-up in tax basis at the date of death. Other assets with losses may need to be sold (and used to offset gains) since losses are not passed on to heirs. Deciding which assets to keep in your estate and which ones to leave to your heirs can make a big (after tax) difference to your heirs.
  • Gifting and Discounts. Now is the time to look at your different assets and project future rates of return and income. No one has a crystal ball, but there are some assets (such as some real estate) that have a higher probability for appreciation than others (such as short-term bonds). It may make sense to gift some high-appreciation assets now to reduce your overall estate tax liability. Also, now is a great time to determine if you can take advantage of minority discounts by creating and/or gifting minority shares in a partnership to the next generation.
  • Beyond the numbers. With different family members in different tax rates, how do you create an estate planning strategy that reduces your overall tax burden and keeps family harmony? There are ways to structure gifting and estate planning so the outcome is fair and makes the most sense for your specific family. It may make more sense to give different assets to different heirs so the strategy makes the most sense for each person after-tax.

Every situation is different, but some rebalancing in your estate planning strategy can make a difference to your income and estate tax liability. Please contact your tax or estate planning advisor for more information.

© Clark Nuber PS and Developing News, 2013. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.