April, 2011
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC

We have an opportunity to transfer large amounts of family assets to the next generation in 2011 and 2012. We are not sure what the income tax, gift tax, and estate tax laws will be starting in 2013. Since we have this two year window I think many people across the country will be taking advantage of these current laws while they are still in effect.

When it comes to capital preservation for your family, there are several strategies that you should think about. Outlined below are a few of the ideas that we are working on.

Income Taxes

Ordinary Income tax stayed the same as it was last year unless you live in Illinois. There is a good chance that ordinary income taxes may increase in 2013 to the old bracket that we had several years ago, which was 39.6%. In addition, starting in 2013 the Obama health care plan has implemented a new surtax of 3.8% on unearned income, such as interest and dividends. Therefore, there is a good chance that the top income tax rate may be 43.4%. What can be done to try and take advantage of these lower rates? Some of the ideas that we are discussing with our clients are outlined below:

  • If you have the opportunity to pull ordinary income into 2011 or 2012 you should probably try to do so.
  • If your corporation is going to be paying large bonuses in the future, hopefully it can be structured so you can receive it this year or next year.
  • If you are thinking about selling your business and there is ordinary income tax involved, try and receive most of the income either this year or next year.
  • Structure your investment accounts to take advantage of municipal tax free income.
  • If you are contributing to a tax deductible retirement account, be sure and put in the maximum each year.

Long Term Capital Gains

Long term capital gains tax is 15% for 2011 and 2012 and it may increase to 20% or higher in 2013. Also, the Obama health care surtax of 3.8% applies to capital gains. That means long term capital gains tax rates are scheduled to be much higher in 2013. To protect against this possible jump in capital gains rates consider the following:

  • If you are planning to sell your company in the near future we should try to complete the sale while capital gains tax is still low. If you are thinking about selling your company in the next 3 to 5 years, you may want to speed up the process.
  • The structure of the sale is very important in order to minimize ordinary income tax and maximize long term capital gains. If one of your children is going to be buying your stock, then perhaps you might want to take a higher amount of income this year or next year and gift stock in future years.

Gift Tax

The gift tax laws made a huge jump in January. Lifetime gifting was increased from $1 million to $5 million. However, this higher limit is only available in 2011 and 2012, under the current laws. In 2013 the gift tax limit may revert to $1 million. Therefore, we have the opportunity to move more assets to family members and avoid estate tax which could be as much as 55% in the future. By using this new gift tax law with higher limits, we will be able to preserve more assets for the family to use in the future.

  • Many of our clients have already used their $1 million lifetime exemption and now we have the opportunity to discuss the possible use of the additional $4 million that they now have to work with.
  • Sometimes gifts are made outright, but usually gifts are made by using limited liability companies, family limited partnerships, or trusts. By using these vehicles, discounting methods allow us to magnify the benefits of these gifts.
  • Moving assets out of your taxable estate is usually a good idea, but most clients that we work with want to retain a high level of control over management of those assets. Limited liability companies, family limited partnerships, or trusts can help with this as well.
  • For closely held family businesses, and the next generation that will be taking over, this year or next year would be a good time to start the process.

Estate Tax & Trust Documents

Some of the biggest changes in this tax law came in estate planning. As you may know, the estate tax exemption was $3.5 million in 2009 and was eliminated in 2010. Here in 2011 and 2012, the exemption amount has jumped to $5 million with a 35% tax rate over that exemption. In 2013 the exemption may stay at $5 million or it could revert to $1 million or congress may come up with something new. Here are a few ideas to think about:

  • Due to the estate tax law being changed several times in the last 10 years we are very concerned about our clients’ trust documents and how they will be funded based upon the language in the document in the year it was written. Most attorneys prepare documents which are flexible and will adjust with the changing estate tax laws. Even if the document is well prepared, we still have to be concerned about how the assets are titled and will the document meet the family’s needs.
    For example, if a client died in 2009 with a net worth of $5 million their document would probably indicate that $3.5 million would go to the Credit Trust/Family Trust and $1.5 million would go to the Marital Trust. If that same client died in 2011 with a net worth of $5 million there is a good chance that $5 million would go to the Credit Trust/Family Trust and zero would go to the Marital Trust. For some families that allocation would be fine and for other families it would not.
  • “Step up in basis,” is an important item that we constantly talk to our clients about. Congress was thinking about eliminating the step up in basis, but at the last minute they left it in the rules and we still have that advantage for this year and next year. This rule basically eliminates capital gains tax on assets when someone dies.
  • “Portability” of estate tax exemption is a new provision that will help save future estate taxes. Portability means that if a husband dies first with $3 million of assets in his name and he only uses $3 million of his exemption the remaining $2 million can be used by his wife upon her death, which gives her a total of $7 million.
    This makes it easier to have a different amount of assets in each spouse’s name. Normally we try very hard to make sure that each spouse has enough assets to fund their credit exemption trust. In other words, currently it would be preferable to have $5 million or more titled in each spouse’s personal name or their personal living trust.
    The titling of assets is very important for family wealth management. Sometimes it is preferable to have assets in the husband’s name, the wife’s name, or sometimes we use tenants-in-common. For many families it is preferable to have major investment assets in trust name rather than personal name, and joint ownership of major assets is not usually the best choice.

State Estate Tax and Inheritance Tax

Another area we have been watching is the changing inheritance tax or estate tax laws in all 50 states. Several years ago individual states would always receive a portion of the federal estate tax paid, but that is no longer true. Since most states need additional income, some of them have been changing their inheritance tax laws. Because federal and state estate tax laws have changed many times the last 10 years, we think it is important that our clients have their documents reviewed to make sure that the trust provisions still fit the family needs.

The language of trust documents, the ownership of assets, and beneficiary designations in different contracts all need to be reviewed based upon the new laws that we have currently. For some clients putting $5 million into the credit trust is the best long term planning technique, but for other families perhaps the amount should be less.


A wise man once said: “It is not how much you make - it is how much you keep that counts.”

  • Wise use of income tax laws is important for every client that we work with. If we can reduce income taxes slightly, that means that clients can hang onto more of their cash flow to help build their net worth.
  • Wise use of gift taxes allows us to move more assets away from future estate tax and into a vehicle for the next generation.
  • Wise use of estate tax laws allows our clients to protect their net worth so that future generations will have more capital to work with which will hopefully allow them to do better things for their families and their communities.

As I said earlier, we have a two year window to implement ideas to protect your net worth, and your family for several more generations. Hopefully this review of many ideas will help you and your family develop strategies for the future.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .