Established in 1912, Johnston, Allison & Hord offers clients
an exceptional level of legal services with a uniquely personal
touch. We provide thoughtful counsel that assimilates quality
legal advice with pragmatic business considerations. As we
celebrate our firm’s centennial, we pride ourselves on our
continued ability to serve our clients’ legal needs on a variety
of matters.
Based in Charlotte, North Carolina, we employ over 40
attorneys specializing in a variety of practice areas, including
financial services, construction, litigation, corporate, trusts and
estates, employment, real estate, health care and creditors’ rights.
Pictured, from left to right is the Trusts & Estates Group:
First Row: Lucy Siler, Ray Farris, Holly Norvell
Second Row: Darrell Shealy, David Lewis, Melissa Gray,
Morry Johnston
1065 East Morehead Street, Charlotte, NC 28204
704.332.1181 www.jahlaw.com
And You Thought 2010 Was Confusing?
In late December 2010, a lame duck session of
Congress passed and the President signed into
law the 2010 Tax Act. The Act extended the
so-called “Bush tax cuts,” that otherwise would have
expired at the end of 2010, and provided significant
taxpayer-friendly provisions for gift, estate, and
generation-skipping transfer taxes. The provisions of
the 2010 Tax Act are scheduled to sunset at the end
of 2012, and once again we are left trying to plan for
potentially valuable tax exemptions in an extremely
unpredictable environment. If it feels a lot like the
dilemma faced in 2010, it is, except the stakes are
even higher this year.
Transfer Taxes
• An increase in the estate, gift, and GST tax
exemptions to $5,120,000 (including the inflation
index for 2012);
The 2010 Tax Act made significant changes to the
estate, gift, and generation-skipping transfer (GST)
tax laws for 2010, 2011 and 2012. Most of these
changes are favorable for the taxpayer, and all are
scheduled to expire at the end of 2012. Given the
uncertainty and the potential economic impact of the
sunset, most estate planners recommend a thorough
review of estate planning opportunities before year
end. The most significant taxpayer-friendly revisions
include the following:
• A reunification of the estate and gift tax exemptions
so that an individual can give away during life or
at death the maximum exemption (through 2012);
• The introduction of “portability,” which permits
the estate of a surviving spouse to take advantage
of the unused exemption of the first spouse to die
(provided that the first death occurred in 2011
or 2012).
• A reduction of the estate, gift, and GST tax rates
to 35%;
2012
2013 and after
35%
55%
$5,120,000
$1,000,000
Portability Of Estate Tax Exemption
Yes
No
Top Gift Tax Rate
35%
55%
$5,120,000
$1,000,000
35%
55%
$5,120,000
$1,400,000 million (approximately)
Top Estate Tax Rate
Estate Tax Exemption
Gift Tax Exemption
GST Tax Rate
GST Tax Exemption
a $1,000,000 exemption for estate and gift tax
purposes, a $1,400,000 GST exemption, and a 55%
maximum rate.
If Congress fails to take action before the end
of 2012 (or in the early days of 2013) the estate,
gift and GST tax laws in existence before the
2001 Tax Act will return in 2013. This will mean
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Transfer Taxes Continued
whether to use all or part of this exemption can be
a difficult decision, and the decision depends on
the total current and expected taxable estate of the
client, the basis of the assets to be transferred, the
potential income tax “costs” of transferring assets
with a carry over basis, and the amount of assets
needed to support the client through retirement. If
structured properly, the $5,120,000 gift exemption
that is available through the end of 2012 can
remove significant assets and appreciation from
the potential estate or generation-skipping
transfer tax system. Estate freeze techniques that
take advantage of the current low interest rate
environment also are highly effective and can be
combined to leverage the use of the gift exemption.
These techniques, such as intra-family loans and
grantor retained annuity trusts (GRATS), have
been discussed in previous newsletters.
The future for federal transfer taxes remains
uncertain, at best. Absent any legislative relief, the
2010 Tax Act will sunset and rates and exemptions
will revert to those mentioned above (before the
enactment of the 2001 Tax Act). Although this
is a punitive default rule, President Obama is on
record supporting a $3,500,000 estate and GST tax
exemption, a $1,000,000 gift tax exemption and a
uniform tax rate of 45%. Republican Presidential
candidate Mitt Romney is on record favoring a full
repeal of the estate tax, while others in Congress
support a continuation of the favorable rules in
existence today.
Uncertainty in the transfer tax environment
produces several reactions. Many knowledgeable
advisors recommend aggressively taking advantage
of increased gift tax exemptions to move assets
to beneficiaries before the end of 2012. Time
may well be expiring on the largest estate and
gift tax exemption in U.S. history. Considering
Income Taxes
of the itemized deductions. Most deductions will be
subject to this limitation, including mortgage interest,
state and local taxes, and charitable contributions.
Many taxpayers’ effective tax rate will increase
approximately 1%.
The 2010 Tax Act extended most of the income
tax benefits of the Bush tax cuts. Like the transfer
tax provisions of the 2010 Tax Act, these too are
scheduled to expire at the end of 2012. In 2013, the
top marginal ordinary income tax rate is scheduled to
increase to 39.6% from the current rate of 35%. With
the addition of the “investment surtax” and additional
limitations on itemized deductions, the effective top
marginal rate will approach 44%.
Although not part of the 2010 Tax Act because it
was introduced as part of the 2010 Health Care
Act, the year 2013 also will usher in a new 3.8%
net investment surtax (sometimes referred to as a
Medicare surtax). The surtax will be imposed on
taxpayers with modified adjusted gross income in
excess of $250,000 for joint filers (or $125,000 for
single persons and those filing separately). The surtax
will be imposed on the individual’s “net investment
income.” Investment income is defined broadly as
income from interest, dividends, annuities, royalties
The long term capital gains tax rate will increase from
15% to 20% in 2013 (or 23.8% with the investment
surtax), and dividends will again be taxed as ordinary
income. Also returning in 2013 is the limitation on
itemized deductions, so that itemized deductions will
be reduced by an amount equal to 3% of adjusted gross
income above the threshold, but not more than 80%
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Income Taxes Continued
interest rates and the Applicable Federal Rate (AFR)
to record lows. In a low interest rate environment,
certain estate planning techniques such as grantor
retained annuity trusts, charitable lead trusts and
even intra-family loans increase the likelihood that
there will be remaining principal to be distributed to
beneficiaries at little or no transfer tax costs. These
specific techniques have been discussed in previous
newsletters, but they have increased importance when
considered with the political uncertainty and potential
tax changes discussed in greater detail below.
and rents. Notably, capital gains and certain income
from partnerships and subchapter S corporations will
be subject to the surtax.
Also introduced as part of the 2010 Health Care Act
and beginning in 2013, an additional 0.9% hospital
insurance tax will be imposed on “high income” wage
earners. For purposes of this additional tax, a high
income taxpayer is one who has a combined wage
income in excess of $200,000, or $250,000 if married
filing jointly (not indexed for inflation).
Planning With Low Interest Rates
Uncertainty in the global equities market has caused
the value of U.S. Treasuries to soar. This has pushed
Like 2010, Only Worse
the same. In any of those combinations it is difficult
to predict what the outcome will be on the Federal
transfer tax system.
Many clients may recall from 2010 the challenges
associated with planning in an uncertain tax
environment. In 2010, the result of the potential sunset
was the same (the transfer tax system as it existed
before the 2001 Tax Act); however, in 2010 taxpayers
had a $1,000,000 gift tax exemption instead of the
$5,120,000 current gift tax exemption. Therefore,
the potential reduction in value of the available
exemption and corresponding planning opportunity
is even more significant in 2012. Compounding this
year’s uncertainty is a Presidential election as well as
significant Congressional elections. Thirty-three of the
100 seats in the Senate will be contested in November.
Currently, Democrats are expected to have 23 seats up
for election (including two independents that caucus
with Democrats), while Republicans are expected
to have only 10 seats up for election. All potential
combinations are “too close to call” as of the date of
this newsletter. Control of the White House and both
houses of Congress could change, or all could remain
Universally, we encourage clients to begin the planning
and thought process now. If you wait until after the
elections in November to begin your planning process,
you likely will not have better information than
presently available to you, and you are more likely
to make a hasty decision and have insufficient time
to implement the plan before year-end. Our Trusts
and Estates Group, like most other planners with
whom we have discussed this topic, are experiencing
heavy volume already in 2012 and may be unable to
accommodate last minute planning decisions at the
end of the year.
We encourage you to contact one of the members of
our Trusts and Estates Group listed on the front of this
newsletter and begin the discussion around how and
whether to do planning before the potential tax change
that occurs at the end of 2012.
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