While concern over the seemingly imminent expiration of a historically large estate and gift tax exemption has been a dominant topic for estate planners in recent years, the preservation of that exemption through 2014 has highlighted other ongoing trends impacting the long-term asset management strategy of business owners and high-net-worth families.
While not new concepts for estate planners and wealth advisers, higher income taxes and the broader outlook for the economy have stepped more into the spotlight for 2014.
[caption id="attachment_85592" align="alignleft" width="200"] Nick Donovan[/caption]
"It's a different story than last year -- there's no imminent fear of changes," said Nick Donovan, partner and chair of the Succession Planning Group at the Napa-based law firm Gaw Van Male.
It was in January 2013 that Congress passed the American Taxpayer Relief Act, extending a number of temporary tax provisions enacted through various legislation following the recent economic recession.
High on the list of provisions expected to change was the combined estate and gift tax exemption, which allowed a married couple to combine their exemption and pass on more than $10 million in assets before or after death without penalty. Some anticipated the exemption would revert to the combined $2 million for married couples in place before 2010, closing a window that had provided huge flexibility in estate planning.
With that provision extended essentially as-is, other concerns, like the impact of a challenging economy on heirs, are catching greater attention.
With heirs possibly facing greater financial strain than their benefactors, the desire to plan long-term creditor protection has increased, Mr. Donovan said. Individuals are beginning to consider holding assets in trust for a longer period, past an age that might otherwise be appropriate for dispensing an inheritance to the beneficiary.
"It's a way to say that, if the kids go bankrupt or get into problems, the assets can be protected," he said.
Conversely, the increase in expenses for higher education has some individuals drawing earlier on assets that might otherwise go to fund an inheritance, using up some of the lifetime estate and gift exemption, he said.
"We used to say, 'Give a fractional interest in the company for a benefit down the road.' But now people are seeing a more immediate need," Mr. Donovan said.
Not all economic news has hinged on looming challenges, however. Many investors, particularly those who rebalanced to hold more equities in the depth of the recession, saw huge gains in 2013.
[caption id="attachment_85593" align="alignright" width="200"] Richard Stone[/caption]
It was in May that the Dow Jones Industrial Average topped 15,000 for the first time in its history, only to top 16,000 in November. Market improvements helped recover the portfolios of some who were hard-hit in the recession, said Richard Stone, founder and chairman of the San Rafael-based wealth management and advising firm Private Ocean.
Yet with those gains comes the possibility of greater risk, highlighting the importance of balancing a portfolio, he cautioned.
"We've had a phenomenal year in capital markets on a global basis, and particularly in the U.S.," Mr. Stone said. "This is a poster child for rebalancing this year."
The New Year is not devoid of new tax issues. The Internal Revenue Service issued final regulations in late November to guide implementation of a 0.9 percent income tax connected to the Affordable Care Act for tax year 2013. The "Additional Medicare Tax" tax affects individual wages above $200,000 and jointly filed wages above $250,000, and contributes to what planners said is a heightened income tax environment in California in particular.
[caption id="attachment_85594" align="alignleft" width="200"] Joseph Kitts[/caption]
"With that certainty -- or at least, perceived certainty -- in the estate tax world, given the increases in federal income taxes and in California, the combined income tax concerns are kind of overshadowing the estate world," said Joseph Kitts, tax partner at the Santa Rosa office of BPM - Accountants and Consultants. "We're concerned about getting the highest step-up possible, because income tax can be near 50 percent."
Few are likely to face those taxes during their working years, but the sale of a business as part of a retirement plan or the passage of a high-valued land asset could have an unexpected tax impact for the unprepared.
While still watching for possible congressional action concerning the estate tax exemption, many planners are now considering the increased likelihood of legislation that could impact a popular tool known as an "intentionally defective grantor trust," Mr. Kitts noted.
The structure allows the benefactor's estate to generate income and appreciate while shielding their beneficiaries from a corresponding tax liability -- a useful tool at a time when the economy is expected to gradually improve. Business owners can pass on ownership to the next generation while maintaining control of their company, and individuals can maximize the benefit to their offspring.
"There's likely to be talk in Congress about IDGTs this year," Mr. Kitts said.
