Cliff fears, tax rises mean payday for tax advisers
The imposition of increased U.S. tax rates on the nation's highest earners is expected to provide a mini-bonanza for the army of lawyers, accountants and tax advisers who can devise ways to reduce clients' taxable income.
They were already run off their feet at the end of last year as many wealthy people sought advice on estate planning and gifting on fears that tax exemptions would be slashed. Vacations were canceled and staff added to handle mountains of work.
Now the deal to avert the "fiscal cliff" that was reached in Congress on January 1 will likely give rise to additional work for lawyers and accountants specializing in tax affairs and the middle men who help seal tax-friendly real estate deals.
"With so many (tax) triggers kicking in, people are really confused," said Robert Lickwar, an accountant in Farmington, Connecticut. "I think it is going to be busy."
Tax changes imposed by the U.S. health-care reform law, particularly a separate investment income tax, add to the confusion, he said.
At Cadwalader, Wickersham & Taft LLP, five lawyers and three accountants specializing in trust and estate administration became well acquainted with the wee hours of the morning as they handled nearly five times their typical December workload, sometimes working as late as 3 a.m., said Robert Lawrence, chairman of the firm's private client group in New York.
They were not alone.
"I don't want it to be at that level again, said Philip Michaels, a trust and estates partner with Fulbright & Jaworski who said the lawyers in his group billed 45 to 60 percent more hours than normal in December.
The group - six lawyers, two paralegals and four or five secretaries - stopped accepting clients the first week of December, turned away business later in the month, canceled vacations and allowed no time off, save for Christmas day, Michaels said.
Under the new law, individuals earning more than $400,000 ($450,000 for couples) see their top income tax rate rise to 39.6 percent from 35 percent and their capital gains tax increase to 20 percent from 15 percent. In addition, the nation's U.S. health care reform law imposes a 3.8 percent tax on investment income for those with adjusted gross income over $200,000 ($250,000 for couples). The deal also caps exemptions and itemized deductions for adjusted gross income above $250,000 ($300,000 per household).
Tax exemptions on estates are little changed, though the tax rate on estates of more than about $5.25 million for an individual and $10.5 million for married couples increases to 40 percent from 35 percent.
While a brief lull is likely as clients digest the implications of the changes on their wealth planning, people who didn't make the deadline to gift assets are among those who will be back in 2013, since the exemption is now permanent and will rise with inflation, said Michaels.
Lawyers also expect a surge in their estate planning business - with a price tag of about $3,000 to more than $10,000 per plan. Many wealthier Americans put off estate decisions because of tax uncertainties, said Gary Altman, an estate planning lawyer in Rockville, Maryland.
"People who haven't done planning will start now because they know it's final rather than something that can be changed at whim," he said of the estate and gifting exemptions and tax rate.
Accountants will be in particularly high demand as the wealthy seek to minimize the blow of higher income and capital gains taxes, lawyers and accountants say.
Demand for advice on income and capital gains deferral strategies will likely be strong, said Matt Hilbert, an accountant and senior tax manager at Pitcairn, a Pennsylvania-based family office.
One deferral strategy, like-kind exchanges, lets investors sell real estate or some other types of assets, and defer the gain by buying an asset of a similar type and value within a certain period. But sellers cannot directly hold the sale proceeds they are using to buy the replacement asset.
That's a boon for "qualified intermediary" companies that federal tax rules require handle the exchange transactions. For a fee of between $750 and $2,000 - and sometimes interest on the funds they escrow - these middleman hold the sale proceeds temporarily and transfer the property to the buyer. The middleman also buys the replacement property with the funds from the sale, then transfers the new property to the original customer, who avoids taxes on gains.
One such intermediary company, Asset Preservation Inc, a unit of Stewart Information Services Corporation, saw a 30 percent jump in business in 2012 from the previous year, according to Scott Saunders, senior vice president. The firm is expanding its work force by 25 to 30 percent - to about 43 employees - in preparation for an expected increase in business this year because of the tax changes.
REAL ESTATE APPRAISALS
The surge in demand for tax advisers also sparked a boom for real estate appraisers, who were called to determine the market value of properties clients were gifting.
The year-end workflow was triple the norm at Miller Samuel Inc, a New York-based real estate appraisal firm. Jonathan Miller, president and chief executive, said he began turning down tax-related appraisals in early December so the firm could service its mortgage and refinance clients.
Appraisal costs vary widely by geographic area, but can run between $2,500 to $6,000 for a high-end property.
"I was calling it Bedlam in appraiserville," Miller said.
Some appraisers, including the Appraisers Group Inc in Belmont, Massachusetts, also enlisted the help of accountants specializing in the valuation of so-called partial real estate shares, which wealthy individuals can use to score a tax break by gifting just a portion of a property, or another asset.
An owner who gifts 51 percent of a vacation home, for example, can discount the value of his or her estate to reflect the portion of the asset that is now outside his or her control. Specialized appraisers and accountants are usually needed to determine the discounted value, according to Richard Goulet, Appraisers Group president.
Higher capital gains taxes will likely spark more interest among the ultra wealthy - typically those with more than $100 million in assets - in charitable remainder trusts, one of the few ways to defer gains on assets that balloon in value over time, according to David Stoll, a trusts and estate lawyer for Milbank Tweed Hadley & McCloy in New York.
Via a trust, a person may donate an asset, such as stock, to a charity. Afterwards, any profits on the sale of the asset are exempt from the capital gains tax and the proceeds can be reinvested. The donor also scores by receiving annual payments from the trust and an income tax break, provided certain conditions are met. The charity gets what is left of the assets when the donor dies.
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