How do concerns about the fiscal cliff affect the tax planning strategies of millionaire investors?
What national issues do America’s wealthiest investors worry about most? At the top of the list are national security, the U.S. economy, current political environment and tax planning.
Three-fourths of investors with wealth exceeding $25 million acknowledge that the state of the U.S. economy has been weighing on them over the past two years and say they are concerned about an increase in taxes, according to our recent study $25 Million Plus Investor 2012.
The economic downturn and related tax concerns have caused 45 percent of these affluent investors to reallocate their assets. How are these issues influencing the tax planning of $25 million plus investors?
Let’s take a look at their top five strategies:
1. Investing in tax-free bonds: Municipal bonds are one of the most common tax planning strategies of affluent investors, according to Millionaire Corner research. “The interest earned from municipal bonds is free from federal income tax, and, in some cases, state and local tax,” according to investor information provided by Edward Jones, but the bonds may be subject to state, local or alternative minimum taxes.
2. Revising estate plans: A changing tax environment makes it “critical” for investors to review their estate plans, according to an advisory from Putnam Investments. Estate plans positioned for federal estate taxes must also be evaluated for inheritance taxes as the state level.
3. Meeting with a tax specialist: Tax consultants can provide a variety of tax services, from preparing tax returns to giving advice on tax matters, according to the wiseGEEK. Tax professionals can charge a flat fee, an hourly fee or a percentage of an anticipated rebate and commonly have a specialty, such as property taxation. A tax attorneys is a “trained specialist that can present a wider scope of reliable lawful advice” on tax planning issues, according to the Tax Attorney Blog.
4. Increasing charitable contributions: Higher tax rates in 2013 would increase the tax benefits of deferring large charitable donations, according to a statement released this week by Thomson Reuters, a financial information provider. The firm advises, “Taxpayers should consult with a tax advisor before applying these or other tax strategies.”
5. Tax-advantaged life insurance: Life insurance can play a role in tax planning for affluent investors seeking to reduce their estate taxes. An irrevocable life insurance trust can remove the policy pay out from the taxable estate under tax laws up for renewal at the end of the year, according to the website NOLO. Investors can also give their life insurance policy to another person, but taxes will apply to gifts larger than $13,000 per recipient per year, under current tax laws. When investors give away a policy they lose the ability to change beneficiaries, change or cancel the policy or borrow against the policy.
Less common tax-planning strategies of $25 Million Plus investors include moving to a state that doesn’t have state income tax.