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Quick Fixes for Last-Second Client Year-End Transactions

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As the holiday season wanes and as we look into the fiscal cliff abyss, many clients are scrambling to make last minute gifts or sales that could substantially reduce their tax liability. There are still a few maneuvers that allow clients to take advantage of current high exemptions and low tax rates. Though there is no one-size-fits-all solution, there are guidelines that can help you formulate last minute strategies that are simple enough to be executed in just days—strategies that can save your clients a bundle in 2013 and beyond.

Gifts That Keep Giving

As most clients know, the current $5.12 million gift tax exemption is set to expire effective January 1, along with a slew of other provisions that have created substantial tax savings for years, and to revert to its pre-Bush-era $1 million level. For many clients, this is not an issue—high-net-worth clients are wealthy enough so that taking advantage of the exemption was a no-brainer and most of the middle class would never have to “worry” about making a gift so large.

However, there is a group of relatively wealthy clients who may have put off making the decision, because, to this group, a more-than-$5 million gift is feasible yet represents a very substantial portion of their net worth. A client who falls into this category may have finally decided to make the gift but may not want to give up so much cash permanently, and valuing non-cash assets for gift tax purposes takes time that we do not have left in 2012. There is still hope.

The IRS permits the creation of an irrevocable trust where the trust creator funds the trust with assets (whether cash or non-cash property) today but can exchange that property for something else in the future. This technique not only allows clients flexibility—they can fund the trust with cash and regain control of that cash next year if necessary—but it solves an important gift tax valuation issue.

Non-cash gifts—especially large non-cash gifts—must be professionally appraised to determine their worth and whether taxes are owed on the gift. If the client funds the trust with property that turns out to be worth more than $5.12 million, he would owe taxes. But if the trust contains a power of substitution, he can simply substitute less valuable property once the appraisal is complete.

Last Minute Sales: The Capital Gains Rush

Capital gains taxes may have received less media attention than income taxes in recent weeks while the politicians in Washington attempt to reach a fiscal cliff compromise, but the fact remains: they are set to increase substantially in 2013. Long-term capital gains are currently taxed at 15% for taxpayers in the upper tax brackets, but taxpayers in the 10% or 15%  tax brackets pay no tax on these gains in 2012. The rates are set to increase in 2013, but a sale still may not be appropriate for everyone.

Clients must examine their investment goals to determine whether a sale at 2012 rates would be beneficial, but there are some simple guidelines to help them. One of the most important considerations is whether the client wants to remain a long-term investor.

For example, if a client was planning to sell assets within the next year to purchase a home or pay for a child’s education, they would likely be better off recognizing the gains at 2012 rates and foregoing the added year of investment growth—especially if they’re in the 10% or 15% brackets. Even longer-term investors can benefit from selling investments today, because they have the opportunity to sell the assets tax-free and reinvest, potentially stepping-up their cost basis if the purchase price for repurchasing the assets is higher. This would reduce the amount of gain that would have to be realized at some point in the future.

Longer-term investors who are subject to the 15% capital gains rates should still examine their investment mix, but would likely be better off deferring taxation into the future if their investments otherwise meet their goals. Long-term investors who cash out their investments at 2012 rates and want to reinvest will have less investment capital available after paying the 15% tax on the sale and will realize lower growth in the long run.


2013—and higher tax rates—will be here before we know it. Despite this, these basic guidelines can help your clients quickly execute transactions and make decisions to reduce their tax liability if they have waited (as lots of us do) until the last minute to plan. 


We invite you to visit the AdvisorOne Fiscal Cliff landing page for up-to-date coverage on the fiscal cliff negotiations and the implications of going over the cliff.

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You may also be interested in signing up for a free trial with another Summit Business Media partner, Tax Facts Online.


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