‘Fiscal Cliff’ Jacks Up Tax-Planning Pros’ Workload
The stretch between Labor Day and Dec. 31 is when estate planning and financial professionals are buried in work, helping clients shore up finances as one year ends and a new one approaches. This year, that may be truer than ever.
Unless Congress and President Obama act to avoid the so-called “fiscal cliff,” the tax cuts passed during the administration of George W. Bush will expire, raising taxes on everyone. That would include estate and gift taxes.
Under the “Bush tax cuts,” as they have been called, the cap was raised on estate and gift taxes so that those with estates worth less than $5 million were exempt from being taxed. Maximum taxation rates are also set to rise from 35 percent to 55 percent. In Massachusetts, estates valued at more than $1 million are subject to state taxes.
Unless there's a deal to extend the federal tax cuts, as there was in 2010, the cap will revert back to the $1-million ceiling in effect before the cuts were passed in 2001.
According to Jeffrey Meenes of Blueprint Financial Planning LLC of Worcester, that means more people who consider themselves middle class could pay a considerably higher tax rate when they pass their estates on to children or other heirs, unless Washington acts by the end of the year.
“I think it has a very wide impact, to more than just wealthy individuals, but the middle class as well,” Meenes said, pointing out that a married, middle-class couple could easily have $1 million in assets, including real estate and other investments.
As a result, the usual end-of-year flurry of activity for estate planning professionals has been more pronounced, according to Meenes. He said that this year, his staff is extra sensitive to the way tax code changes could impact clients' assets in 2013.
But tax policies, which can be subject to politicians' whims, should always be regarded as tentative, Meenes said.
“It's something we're thinking about all the time for our clients and it's something people shouldn't be waiting to do until the bitter end here,” Meenes said.
But they do wait.
Tracy A. Craig, a partner at the law firm Mirick O'Connell, which has offices in Worcester and Westborough, said there's a general uptick in clients looking to protect their assets from greater taxation through gifting them to children or other beneficiaries.
“A lot of people are now sort of realizing or deciding, 'OK, I do want to gift?'” said Craig, chairwoman of the firm's trust and estate group. “There's an explosion.”
The ability to gift assets while one is still healthy is a luxury not everyone enjoys. Those who have accumulated only modest wealth may not be able to opt for it as a means of avoiding higher taxes, as they must wait until they die to pass real estate and other assets on to children.
More affluent clients may pursue complicated estate-planning tools to protect their assets, but this can be costly.
That's why Craig employs a conservative approach when dealing with impending changes to federal estate and gift taxes. She said there's a plethora of opinions about what will happen before the end of the year. President Obama advocates capping exemptions at $3.5 million with a top rate of 45 percent.
As for charitable giving — another option for relinquishing assets while avoiding taxes — Craig doesn't see a positive or negative effect.
Charitable tax write-offs are available above and beyond exemptions covered by the Bush tax cuts, but Craig said that typically, people give to charity because they truly care about a cause, Craig said.
Impact On Nonprofits?
And tax deductions based on charitable contributions could be reduced or eliminated for top earners if the Bush tax cuts are not extended. This may cause declining contributions to non-profit organizations, though Kate Myshrall, vice president of advancement at Seven Hills Foundation, said fundraising efforts by the Worcester-based human services organization are not subject to the whims of the federal tax code. She echoed Craig's sentiment regarding the appetite for giving.
“The reason people give is because they've developed a relationship with the issues your agency is working on,” Myshrall said. “If you do good work and you publicize that well, you should keep your relationships.”
Still, Seven Hills is mindful of potential tax changes and will make a “strong push” to solicit donations through various annual events and online giving in 2013, according to Myshrall.
But Phil Grzewinski, president of United Way of North Central Massachusetts, believes tax exemptions are a larger driver of philanthropic giving than one might imagine. He noted that one piece of the Bush tax cuts that may expire in January are higher charitable deductions for higher-income taxpayers. This could prove problematic, he said.
“(Tax deduction) is not the only reason, but it is a significant driver to give philanthropically,” Grzewinski said. n
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