By Karen R. Wawrzaszek, Managing Director
Pitcairn Update, Fall 2012 

Click here to download the pdf version.

In thinking about how your household can make the most of the current tax laws without overlooking the basics, we’ve put together the following best-thinking checklist to help inform your planning. Many of the families we serve have used some of these techniques on their path toward creating sustainable wealth.

Image - 2012 Year-End Tax & Planning Chart

1. Do you have college funds that you need to plan for your children or a relative?

  • Make use of your annual exclusion which is currently at $13,000 per person, $26,000 if you are splitting the gift with your spouse. You can front-load a 529 college savings plan with up to five years of your annual exclusion per donee. Please note that the annual exclusion amount is slated to increase in 2013 to $14,000 ($28,000 if gift-splitting).

2. Do you want to start a charitable plan, but are not quite sure who the best charitable recipients are for your plan?

  • Fund an existing or establish a new donor-advised fund to make the most of your allowable exemption for 2012 and stretch grants out over future years.
  • Donate highly appreciated assets to a charitable trust or a donor-advised fund.

3. Consider using low basis stock to fund your charitable trust, private foundation, or donor-advised fund to meet your charitable giving goals.

  • Use IRA assets if you are over 70½ to further reduce your 2013 income tax bill. (Consult with your tax provider for current limits.)

4. Should you accelerate taking long-term gains during 2012?

  • Under the Affordable Healthcare Act, the surtax on long-term capital gains is 3.8% and the total tax looks worse if Bush tax cuts are NOT renewed.

5. Is converting your traditional IRA to a Roth IRA right for you?

  • With income tax rates set to increase, a 2012 taxable conversion could provide opportunities for additional tax-free growth.

6. Consider gifting tax-free up to $5.12 million ($10+ million) jointly to make use of your estate exemption and also the increased generation skipping transfer (GST) tax exemption.

  • Make the gift directly to an irrevocable trust that allocates GST exemption to remove assets from your estate and grow them separately for your heirs.
  • Make use of a family limited partnership to gain greater leverage over the gift through effective use of various discounts in valuing assets.

7. Opportunities still exist to take advantage of the low interest rate environment and favorable wealth transfer rules.

  • The mid-term applicable federal rate (AFR) is at 1.12% (as of October 2012) making it attractive to make gifts to a GRAT (Grantor Retained Annuity Trust).
  • Current asset valuations as well as the interest rate environment make for an attractive environment to freeze assets by selling to an “intentionally defective grantor trust” (SIDGT).

8. Refine your portfolio further to anticipate areas where you can take advantage of current tax law.

  • Consider the sources of your fixed income asset class and if appropriate, shift your weighting to a larger municipal bond holding relative to taxable bonds. The investment income surtax exempts municipal bonds.
  •  In addition to harvesting tax losses for long-run performance, consider taking capital gains (short- and long-term) where appropriate.

9. Rebalance your portfolio to ensure you are in line with your long range targets, making sure to take advantage of any tactical investment recommendations.

10. Maximize your contributions to tax-deferred qualified retirement plans or IRAs to take full advantage of tax-deferred growth.

Click here to download the pdf version.

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