New Tax Rates – New Game Plan for 2013

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Higher Tax Rates

You probably know we now have a new restored 39.6% top marginal tax bracket for high earners. Those people will also be paying a 20% rate on both capital gains and dividends; but, there’s more: These are the people who very likely will be paying an additional 3.8% Medicare tax on investment income.

I’ll spare you all the details on this – you should talk to your CPA – but, the big change may be in the estate tax threshold – potentially $10.24 million for a couple, and inflation indexed for future years.

What this means is that while life insurance, long offered as a tax-favored envelope to protect investment dollars, substantially enhances the benefit of investment buildup inside an insurance wrapper. With the estate tax threshold so much higher than before, the estate tax rationale for insurance trusts now doesn’t seem to apply to most people today.

A technique previously frowned upon by most estate planners now may be worth a look: Purchasing life insurance inside a retirement plan. This allows pre-tax dollars to fund premiums. Previously, estate planners were worried about the inclusion of life insurance proceeds in the insured’s estate. This is no longer an issue for those under the exemption amounts.

Another technique, bypass trusts, may also introduce more complexity – titling assets, dealing with a trustee, filing trust income tax returns, etc. – than most will want or need going forward, especially since the threshold is now indexed for inflation. There are still state estate tax issues, as well as divorce/marriage risk and other issues that estate planners feel should be addressed, and rightly so; but, given the fact that many high-net-worth individuals who gifted most or all of their exemption amounts in 2012, setting up trust for modest assets may or may not be cost effective.

To know where you stand, talk to your estate attorney and CPA.

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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.

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