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Top Tax Strategies for 2012

Top Tax Strategies for 2012 Top Tax Strategies for 2012

Many planners and clients are navigating extreme uncertainty in tax strategy this year, with numerous tax cuts due to expire by the end of 2012.

Notably up in the air: exemptions on the estate tax, the lifetime gift tax and generation-skipping tax, all set at $5 million.

While most planners expect those taxes (and others, including taxes on capital gains and dividends) to increase next year, it’s not clear by how much. But good advisors know better than to guess, or — worse — sit back and wait. And there are a lot of well-honed methods — some better known than others — for lowering tax bills no matter what Congress does.

Financial Planning’s Ann Marsh talked with five planners about some strategies they’re using, and here’s what they had to say:

1. Armond Dinverno, president of Balasa Dinverno Foltz, Itasca, Ill. 1. Armond Dinverno, president of Balasa Dinverno Foltz, Itasca, Ill.

Consider the $5 million estate and lifetime giving tax exemptions while there’s still time.


Thanks to gift-tax and generation-skipping tax exemptions, both in place through the end of 2012, clients can give up to $5 million to any individual (including grandchildren or charity) without owing taxes.

For couples, the limit is $10 million, with a 35% tax on assets above that amount. The $13,000 annual gift-tax exemption also remains in place and does not count against the $5 million thresholds.

Just keep in mind that as early as next year, these exemptions could drop substantially, says planner Armond Dinverno, president of Balasa Dinverno Foltz in Itasca, Ill. “It will be really ugly if it goes back to [2002] when it was at $1 million,” he says.

That said, Dinverno adds that some of his clients have decided against giving money too early to children or grandchildren, whatever the possible tax savings, for fear of depriving the kids of a solid work ethic. But his clients whose older children (or grandchildren) already have their own homes and well-established careers are more willing to pull the trigger. “For them it’s a slam dunk,” he says.

2. Andy Berg, co-founder of Homrich Berg, Atlanta 2. Andy Berg, co-founder of Homrich Berg, Atlanta

Channel estate transfers through family limited partnerships.

Sometimes, a good way to use the gift-tax exemption is by combining it with family limited partnerships, says Andy Berg of Homrich Berg in Atlanta.

“The partnerships are a tool you can use to give away a great deal of wealth, but remain in control of the underlying assets,” he says.

One of Berg’s clients, for example, owned $7 million in commercial real estate. By putting it into a family limited partnership, the actual value of the property was discounted to $4.5 million for tax purposes because it was not liquid. The gift, which fell under the $5 million gift tax threshold, then came tax-free.

3. Jeff Fishman, founder of JSF Financial, Los Angeles 3. Jeff Fishman, founder of JSF Financial, Los Angeles

Open a donor-advised fund.

A donor-advised fund allows a person to contribute any amount he or she wants to charity, without having to name the charity right away.

The tax deduction, however, can be taken immediately, as money in the fund has already been gifted from the perspective of the IRS.

Planners like these funds because they help get money out of the income tax column while buying time for clients. “Part of many people’s identity is how closely tied they are to a charity,” says Jeff Fishman, founder of JSF Financial.

4. Lori Flexer, chartered financial analyst with Ferguson Wellman Capital Management in Portland, Ore. 4. Lori Flexer, chartered financial analyst with Ferguson Wellman Capital Management in Portland, Ore.

Give appreciated stocks, instead of cash, to charity.

Whenever it’s possible, Lori Flexer of Ferguson Wellman Capital Management urges her clients to give highly appreciated stocks, rather than cash, to their charitable causes.

The strategy allows clients both to keep up with their charitable giving and to avoid paying capital gains taxes on low-basis-cost investments.

5. Deb Wetherby, planner with Wetherby Asset Mangement in San Francisco 5. Deb Wetherby, planner with Wetherby Asset Mangement in San Francisco

Work to avoid the alternative minimum tax.

Originally, the alternative minimum tax was designed to ensure that people whose income came mainly from dividends and interest paid their fair share.

Instead, planners say, the AMT rules subsequently were changed, making the tax highly complex and expanding its reach.


Many planners say it’s critical to watch the AMT like a hawk to try to keep clients from becoming subject to it. At that point, clients lose the benefit of many deductions, including mortgage interest tax deductions.


“There isn’t a rule of thumb except that more and more people are subject to it, which wasn’t the original intention,” says Deb Wetherby, a planner and former CPA with Wetherby Asset Management in San Francisco.

Given uncertainty around soon-to-expire tax cuts, what can advisors do now? Here's an interactive slide show in which five planners discuss some top tax strategies.

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