2012 Estate Planning. Martin Inc. Shenkman
the possible impact of several of these changes. A 50-year-old socialite-executive in New York earning a nice salary may lose a substantial charitable contribution deduction for the myriad of wonderful local charities he or she supports, a significant state and local tax deduction, and have to add to income a large amount for his or her health insurance plan if a new cap on what can be excluded is provided for. The new Medicare tax on earnings and investment income may be triggered.
Contrast this with a retiree living in Florida with a comparable income, but no state income tax. This taxpayer might face a relatively low actual marginal income tax rate, even if the Medicare tax on investment income is added. The bottom line difference on these two taxpayers could be dramatic.
High-tax state fence sitters may well be pushed by the net cost of eliminating a state income tax deduction to finally get off the fence and move to a no/low tax state. Residency and domicile issues could become even more significant planning factors.
Use of C corporations to trap income, similar to the personal holding companies (PHCs) of not so many years ago, may again become popular, at the cost of a big income tax hit when the entities are unwound later.
IRAs and Roth Conversions in 2012
The much talked about conversion of an IRA to a Roth IRA might warrant evaluation in light of the possibility of income tax increases. One of the motivating factors to convert a regular IRA to a Roth IRA was that the income tax paid would be removed from your estate thereby reducing your estate tax. If you are considering conversion of a large IRA, the conversion may be enough to avoid the federal estate tax and even the need to file a return. However, if the exemption drops in 2013 to $1 million (or even President Obama’s proposed $3.5 million) this may no longer be the case, but the savings, especially if a 55 percent rate replaces the current 35 percent rate, could be significantly greater. The potential for greater income tax rates in future years, as compared to a potentially lower rate if conversion occurs in 2012, should all be considered. Even if you had evaluated conversion years ago when it first became a possibility, you should again reconsider the pros and cons in light of the current transfer and income tax uncertainties. Opportunity could exist. Roth conversions are an extremely complex and important matter. If you are not versed in these matters, you should secure the assistance of an expert to address the nuances. Additional planning for Roth conversions in 2012 is discussed in Chapter 9.
SUMMARY
The potential income, gift, estate, and GST tax changes make planning for the balance of 2012 very complex. With so much uncertainty, projections based on just number crunching may be misleading. Consider a decision tree approach of making various assumptions about all future tax laws and endeavoring to identify a best and worse case scenario and perhaps a best guess midline tax scenario, then use your judgment to make the final planning decision. With all this uncertainty, there are many planning opportunities that should not be overlooked.
PLANNING NOTE: No one can take all possibilities into account. There are even possibilities that haven’t yet been proposed. The moral of all this seems to be: Plan as best as you can afford to under current law; the future is uncertain; eat dessert first.
The myriad of tax changes being tossed about makes planning daunting. You might in some instances reach quicker and more reasonable planning projections or decisions if you focus on some of the more significant potential changes:
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