Last year, fall arrived with more than the turning of leaves. Rather than just anticipating a happy impending holiday season, anyone with assets valued at $1 million or more was also anticipating the unknown factor of what changes would be made to the Tax Relief, Unemployment Insurance Reauthorization and Job Creative Act of 2010 and how the estate tax would be affected.
Headlines such as this one from a contributor at Forbes, “Grab the $5M Gift and Estate Tax Perk: It’s Gone In 2013”, created, if not a sense of panic, certainly one of urgency with regard to tax planning for estates.
“It could well have been a game-changing shift,” said Jim Levy, MAI, MRICS, chairman of Appraisers and Planners, Inc., a leading New York City-based real estate valuation and consulting firm and, arguably, the oldest and largest firm doing a huge amount of tax-related appraisals.
“Our phones began to ring non-stop beginning in the fall with clients seeking to protect real estate assets and make strategic decisions based on impending changes.”
Though Appraisers and Planners does not directly advise clients with regard to tax planning (clients have tax attorneys to advise them with regard to their best benefit), valuation of owned real estate for tax purposes is a primary focus of the firm.
“Clients were waking up and realizing that the $5 million exemption was anticipated to be history and reduced to $1 million,”said Appraisers and Planners president Ruth Agnese, MAI, MRICS. “Though many clients began planning very thoroughly early in the year, most did not and a true sense of urgency kicked in by the fall. We had clients trying to get in reports at the last minute.”
Then, after much debate and speculation, the American Taxpayer Relief Act (ATRA) was signed into law by President Obama on January 2, 2013. It made the changes from the 2010 law permanent with regard to federal estate taxes, gift taxes and generation skipping transfer taxes, subject to a few changes such as the maximum rate for the aforementioned taxes increased from 35% to 40%.
Scheduled to drop on January 1, 2013 to $1 million per individual, the estate tax exemption remains $5.12 million for individuals and is indexed for inflation.
For Appraisers and Planners, though the incessant need for real estate valuations to meet the end of 2012 deadline has passed, in its stead is all of the paperwork needed to accompany valuations in time for the April 15th income tax deadline for 2012 returns.
“People needed to know the value of their assets by the end of 2012 and those values had to be accurate because gifts needed to be made by the end of 2012,” said Levy. “Now we are working furiously to catch up on all of the formal paperwork.”
Though the paperwork is onerous, all the proper research was done to do the valuation/sales/income approach prior to the end of last year and values had to be accurate because the gift had to be made in 2012.
Advance planning was not, however, the forte of all of Appraisers and Planners clients.
“What we didn’t realize was going to happen, was that a lot of people didn’t transfer actual amounts, just transferred property without appraisals of value, “ said Levy. “Now we’re getting calls about 2012 gifts, including one involving ten properties, that have to be valued before April.”
“Appraisers are subject to Uniform Standard Professional Appraisal Practice (USPAP), such that the value will be the value, regardless of what a client anticipated its value to be,” said Agnese.
As for advice going forward now that the law is signed and permanent, Levy advises clients “to think carefully and make sure they have enough income from investments that they control because once you gift a property, it’s no longer yours.” Of course, conditions and controls can be placed on that gift, such as having your grandniece to whom you gifted your condo pay you rent.
The last word may well be Agnese’s. “In Washington, nothing is ever permanent and what will happen from here is pretty much anyone’s guess. Do your planning sooner rather than later because although, right now, the estate tax exception may be $5.12 million, the game is always subject to change.”