Accounting Today - May 2012

cently I heard from a very successful retired executive who is driving a four-year-old Toyota, instead of a newer, high-line car. He further voiced his satisfaction with that level of compromise due to the hit that his portfolio took in 2008. He, like many, took the full brunt of the downturn and then repositioned to safer ground, and did not participate in much of the recovery.

Lifestyle changes, especially to the downside, are never easy to swallow. But if your client wants to plan for a troubled economic landscape, trimming sooner is always better than waiting until you start to feel signs of trouble.

Uncertainty over tax policy makes tax planning a very difficult issue right now. Taxpayers and professionals are confused and in a quandary over what may happen next. In fact, I’d say that our elected officials have made such a mess of the Tax Code that the safest bet for any taxpayer may simply be to hedge your bets. Make some plans as if taxes are going to stay the same, and then implement other plans that may be defensive in favor of a higher tax rate. Unless you expect a large decline in income, perhaps the only safe posture is to assume that your tax rate is not going down any time soon. This is also likely to be the case in your state. States are under increasing pressure from their own fiscal woes, and looking to new and old ways, such as tax increases, to boost their coffers.

On the estate tax side, confusion over what the law will be is just as paralyzing. Like income taxes, no one knows what our federal unified credit will be come Dec. 31, 2013. As a result, many are doing nothing. Of course, for the client who is very pessimistic about the economy, the likelihood that they will take advantage of the $5 million gifting threshold is not high.

This client may instead choose to own large life insurance policies in irrevocable trusts, rather than gift away large amounts that they may later regret. They may also consider owning valuable assets in protected entities such as family partnerships and limited liability corporations, whereby they can make minority interest gifts, removing large amounts of value from their taxable

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estate, and not materially impair their cash flow with clever document drafting.

Whether the economy is troubled
or not is a judgment call. No one
can deny that we are facing major
headwinds, and no one can accu-
rately assess the consequences of
the de-leveraging process that is
now just beginning. The ones who
will get in trouble are the ones who
do not plan at all. And if they come
asking what you did for them to
plan for what they wanted, it would
be best to show the work that you
did with them today to assess their
feelings and tolerance for risk, and
the moves that you made each and
every year to accommodate their
goals and objectives. AT