A tax attorney predicts that small businesses and high-net-worth individuals will need tax-planning advice to help protect their assets from anticipated changes in tax law.
"Most immediately, we'll see our clients looking to get the most from estate tax minimization," said Phil Tortorich, who specializes in estate-planning law as a partner at Katten Muchin Rosenman LLP in Chicago. "That will be true through the end of the year, especially as they try to make changes before any major new policies go into effect."
He has been hearing concerns from his clients about the tax policies of the next administration. "With a lot of people, there's a certain level of paranoia among high-net-worth individuals with a Democratic Congress and an Obama administration. We are inundated with calls from our clients to intentionally incur capital gains now with a lower rate because they fully expect the rates to go up."
President-elect Barack Obama is expected to take a more regulated, Clinton-esque view on family limited partnerships and close any perceived "loopholes" that currently allow clients to transfer assets to minimize their tax burden, according to Tortorich.
Individuals with appreciated assets (or low-basis assets) could also be impacted by the new president as details of his proposal on capital gains taxes show a hike to 20 percent. Many clients are already considering methods of intentionally incurring capital gains now in order to lock in the 15 percent long-term capital gains tax.
While this goes against the conventional wisdom of deferring tax recognition events for as long as possible, the large potential increase in the tax rate makes it more effective to pay the tax now, according to Tortorich.
"The problem most clients face is how to trigger the gain while also retaining the asset," he said. "Various trust techniques can be utilized in this regard to allow the beneficiaries to continue to have the benefit of the asset but also allow the capital gain to be triggered, resulting in a step-up in basis for the asset."
Like Major League Baseball players or other professional athletes, many high-net-worth clients are looking for ways to beat a proposed income tax rate hike of nearly 5 percent by legitimately shifting as much income into 2008 as possible (see Pro Baseball Players May Avoid Obama Tax Hike). This can work particularly well for cash-basis taxpayers.
Under an Obama presidency, small businesses will be under more scrutiny as well, but there are also options in risk management scenarios for owners to use captive insurance programs and reduce their tax burden. President-elect Obama has said he will increase taxes on individuals making more than $250,000. In the case of a business owner who has an S corporation, all of the business income passes through to the individual's return and is taxed to the individual, even if the company makes no distribution. Moreover, the president-elect has discussed increasing payroll taxes, which will also increase the cost of running successful businesses.
As a means of offsetting some of these increased taxes on the business owner, a business owner can consider a captive, which provides for alternative risk management in a tax-efficient solution. Many of those business owners will start to look for creative measures now to avoid a larger hit down the road and Tortorich figures to be a central part in many decisions.
"We've been doing a lot of captive insurance planning for high-net-worth business owners," he said. "There's a lot of desire by clients to manage their insurance better." He believes the captive planning can be done by year's end if clients start soon. "It's also an ongoing planning vehicle. Even if the rates go up, the captive planning will still be effective." He believes the tax rates will definitely go up for high-income taxpayers and may even go up before the Bush tax cuts are scheduled to expire in 2010.
"The general view of Obama's policies with a Democratic Congress in power is one of less exemptions and higher tax rates on high-net-worth individuals and business owners," said Tortorich. "We'll certainly be busy in the days ahead as we answer the questions and concerns for people during this transition period."
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