Okay, What Now?

Now that the election is over, the discussion on tax hikes is starting to take shape. The rhetoric makes it clear to me that tax rate increases are coming. Additionally, the phasing out of itemized deductions such as mortgage interest and charitable contributions is seemingly headed our way as well. It also appears that we may not see estate tax rules for years into the future which are as forgiving as the rules for 2012.

So what should investors do? Investors with substantial assets are already flocking to their attorney’s offices to create trusts and gifts for heirs that take advantage of the $5.1 million individual gift exemption still available through December 31st. Some older investors are distributing their IRA’s since tax deferral has limited benefits late in life and the deferred tax gets hit twice in death if an estate size is higher than the limit. This will seemingly be even easier to have happen in future years, and paying the income tax now would remove those dollars from an estate which might also pay a 55% tax on those dollars if ignored.

Investors should also consider giving to a donor advised fund(DAF). A donor advised fund is a public charity that holds money for donors to then give to another charity of their choosing at a later date. They function almost identically to a family foundation, without the hassles and high costs. Since the charitable deduction is in jeopardy going forward, cramming charitable contributions into 2012 would seem wise. DAFs are a natural recipient since most have liberal rules about years of future rationing of gifts to your favorite charities. This also works with appreciated securities, which shifts the sale to a non-taxable entity and avoids capital gains tax while still providing a full deduction for the donor. This can even work with gifts of problem real-estate. Even more amazingly, some DAFs accept private stock. Think about the power of gifting a percentage stake in a family business just prior to a sale and funding the next decade of charitable giving in the most optimal tax year, while also avoiding capital gains tax on that portion of a sale. Many companies and organizations offer DAFs. We recently vetted several DAF programs and compiled a spreadsheet of program particulars for a client considering this strategy. Segment selected Vanguard for our company’s charitable and employee gift match program. If you want to save the legwork of a similar exercise, simply email us and request a copy of the report showing the differences between the programs we reviewed.

Before embarking on any of these strategies you should seek tax counsel about your particular situation.

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