With two weeks left before year’s end, and along with it a possible change in gift tax laws, retirees and those planning for retirement are being bombarded with information on how to move assets out of their estates to avoid potential future wealth-transfer limitations and higher taxes.
Here’s some advice: Take a deep breath and think it through before you act. As always, check with a financial adviser (if possible) to determine what the right strategy is for you and your family.
Here’s why this is now an issue. At least until December 31, 2012, gifts and estates of up to $5.12 million per person (indexed for inflation) aren’t subject to taxes, and the rate on estate taxes above that threshold is 35%.
In the event we fall off the fiscal cliff, those numbers revert to $1 million and 55%, respectively. That’s a big difference, and it will hit people across a wide spectrum of income levels, right through to members of the middle class who have assets in excess of $1 million.
In response, people are trying to offload their wealth in record numbers and for record amounts, according to CNNMoney. While that may be right for lots of people, make sure it’s right for you, too, before making any such moves.
CNNMoney quotes Richard Behrendt, director of estate planning for Richard Baird’s Private Wealth Management Group, sounding a warning bell: “I worry about 65-year-old, recently retired couples on fixed incomes with $3 million or $4 million in assets reading about what a tremendous opportunity it is.”
Yeah, me too. Nobody wants to feel like they’ve shortchanged the next generation, and nobody wants to pay more taxes than necessary (of course, that line got Mitt Romney in trouble), but retirement starts with what your needs are — both now and in the future.
Begin with that premise and work backwards. Dividend stocks that are both sound and lasting, such as Procter & Gamble (NYSE:PG), Exxon (NYSE:XOM), Colgate (NYSE:CL) and Johnson & Johnson (NYSE:JNJ), are lifeline stocks that will pay you quarterly cash for holding them. So, don’t rush to lighten your portfolio of income-producing stocks because someone warns you about the taxes they might cause your heirs.
Same for those appreciated stocks waiting to be sold down the road. It’s nice that you want to gift them away from your estate, and you can always do so with philanthropy in mind. But they may come in handy later when you need extra income.
Remember, too, that these transfers must be irrevocable to qualify as a gift. Once you give that asset away, it won’t be yours again, and that includes real estate. Want to give up your house as an asset but still live there? Make sure you understand the rules of a qualified personal residence trust, which are tricky and best left in the hands of a professional, not just online do-it-yourself legal sites.
Remember, your house might be your most valuable asset, particularly once it’s paid off, and a key income source of income when it’s time to sell.
So, what’s the takeaway? Don’t be hectored into action without trying to gain a thorough understanding of what you might gift away and what it might mean for your income and living standard later in life. Tax law can change at any time, and indeed, nobody is quite certain how this one will play out. Most expect some kind of compromise at around the $3 million level for the exemptions, and perhaps 45% on the tax rate.
All of which, of course, will mean another round of planning, and plotting the right strategy.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long XOM and JNJ.