After reading many tax articles lately in various publications and even just listening to non-tax experts like my next-door neighbor, I’ve found that not only do many people believe that timing the stock market is pinpoint achievable, they also view that extreme gambling with the ever-changing tax code is never risky.
For example, a hot topic in many tax articles these days is gift taxes, relative to the inheritance tax, or estate tax, sunset coming near the end of this year. As of January 1, 2013 the tax laws sunset to 2001 levels if not extended by Congress. This will result in the inheritance tax exclusion dropping back from $5 million per person to $1 million, with the tax rate increasing from 35% to a 55% top bracket.
That said, the gift tax exclusion, which allows individuals to give away assets in 2012 up to those exclusions mentioned above with a 35% rate, could actually look beneficial if the law does sunset in 2013 to a 55% rate. However, the issue I have with most advice given on this subject is that it’s a “no brainer” and that every client should give away all their assets in 2012. Rather, there should be a comprehensive outlook advising clients on a far more complicated matter than just a 35% tax rate versus the 55% tax rate possibility in 2013.
As such, I want to make it very clear that gambling on inheritance and gift taxes is no different than the points made in my article published in early 2010 entitled, “The Gamble of a Lifetime.” The article had a slightly different subject matter relative to taxes on Roth conversions, but the nature of the gamble is the same. Almost every advisor seems to be pushing their clients to give away all their assets to heirs, and pay the gift tax now at 35%, rather than inheritance tax at 55% should they die after 2012 (assuming the law sunsets).