By ANNA PRIOR
It has been said that nothing is certain but death and taxes. How much those taxes will be, ironically, is among the biggest uncertainties there are these days. Indeed, with the Bush-era tax cuts and higher exemption limits for the estate tax slated to expire in 2013 -- and talk of more reforms hot in Washington -- financial planners are at full pitch trying to reduce the Uncle Sam shellacking. Their advice, in a phrase: Head for shelter.
While no official estimates exist on the amount of assets currently being sheltered from taxes -- which is to say, kept in investment vehicles that, because of intricacies of the federal tax code, allow money to accumulate with favorable treatment -- the figure is surely astronomical, says an IRS spokesperson. (In fact, every piece of real estate owned in the country could be considered one.) Many financial planners say that number will only spike in coming months, as clients increasingly inquire about their sheltering options. And while opportunities to protect assets are becoming somewhat harder to come by, as the IRS seeks to close loopholes, says Abe Schneier, senior technical manager for the American Institute of Certified Public Accountants, planners say some very effective (and legal) shelters remain -- many of which are often overlooked.
Some advisers, for example, are turning to the slightly exotic world of oil- and gas-drilling leases as well as to real estate investment trusts. Investors can get an immediate write-off of anywhere from 70 to 100 percent of an investment in oil- and gas-drilling leases, says Robert Russell, a president of wealth-advisory firm Russell & Co. in Dayton, Ohio, which specializes in high-net-worth clients age 50 and older. "Essentially, such investments reduce your income by a dollar for every dollar you put in," he says. The strategy doesn't come without risk, he cautions, since the investor becomes a general partner and therefore would probably assume any liability for employees injured on the job -- though insurance can offset some of the exposure. As for REITs, say pros, direct investors benefit taxwise from a law that allows for a write-off for capital improvements and depreciation of a home or other type of property.
Another frequently ignored option is the 529 plan. Though many investors have ditched this college-savings vehicle in recent months (an estimated $354 million was pulled from plans in the third quarter of 2011 alone), some experts are encouraging their clients to stay in. While fund selections in 529s can be extremely limited, many advisers say the tax-sheltering benefits more than make up for the weaknesses of the plans. For one thing, money in 529s grows tax-deferred and is tax-free if used for qualified education expenses. Plus, there's no limit on how often the beneficiary of the plan can be changed, in case the child ends up not needing the money for college. "It's essentially an inexpensive multigeneration educational slush fund," says Eric Toya, a financial planner with Trovena in Redondo Beach, Calif. One thing to note, say experts: States don't want these plans being used just as tax shelters and may investigate a contribution that's unusually large.
Planners also say that many people miss an effective tax shelter that's right under their nose: converting a traditional 401(k) to a Roth account. "Tax rates are in the clearance bin right now," says Russell, noting that after the initial tax bite, assets can grow tax-free and are protected from future tax hikes. Still, less than half of respondents to an Aon Hewitt survey of large employers said they offer 401(k)-Roth conversions. One reason, say experts, is that not all companies are eligible to get their own tax break for matching contributions if they are in a Roth account. Otherwise, it doesn't cost the company much to offer this choice, says Martin Kurtz, 2012 Financial Planning Association Chair. Too bad, he says: "Any option an employee has to enhance their retirement situation has got to be good."