Effective Strategies for Accountants and their Clients

Effective Strategies that Accountants Can Use Starting Today to Help Clients Avoid Additional Taxation as a Result of New Tax Laws in 2015

Many accountants are advising their clients to take steps now to reduce their tax bills by sheltering investment income and other sources of income. Well-to-do investors feel the most significant effects and will face the dual impact of Affordable Care Act and possible capital gains tax hike. The Affordable Care Act will impose a 3.8 percent tax on investment income and a 0.9 increase in payroll taxes for those who earn more than $200,000 per year or $250,000 per household. If Congress doesn’t extend the capital gains tax breaks, those same investors will see a jump in the top rate of capital gains from 15 percent to 25 percent. The top rate on dividends will potentially triple to 43.4 percent.

Since the new tax laws set to begin on January 1, 2015, the clock is ticking. With the healthcare act-related tax increase and the degree of uncertainty in the capital gains tax rate, accountants are wisely advising their clients to take action now to minimize their exposure to new and increased taxes. By helping your clients avoid additional taxes, you can also boost your own reputation, generate new clients from referrals, and enjoy the benefits of positive word of mouth. There are many strategies that can be used to shelter investment income from tax increases including creating trusts, gifts, and transferring assets to limited partnerships.


One of the simplest solutions is to create a trust. Many clients set up trusts as part of a multigenerational planning strategy, which involves using special types of trusts that are exempt from inheritance taxes and are often used to reduce estate taxes in wealthy families. In addition to shielding income from taxes, trusts can also prevent recipients from imprudent expenditures and from legal action such as divorce, creditor claims, and lawsuits.

There are numerous types of trusts, so it’s important for clients to consult with a qualified and informed accounting professional to make sure that the trust they set up will achieve their goals. Creating trusts as part of an estate reduction and tax mitigation strategy can be complex and is often a strategy that only skilled accounting professionals, particularly CPAs, are aware of and equipped to handle successfully.

Grantor Trusts

Grantor trusts are often used for income-tax purposes. With a grantor trust, clients have the option to transfer significant amounts of wealth to their beneficiaries and avoid both gift taxes and estate taxes. Depending on how the grantor trust is set up, beneficiaries receive an income stream from the trust. Grantor trusts can be a great way to reduce a client's estate and enable trust assets to grow faster.

Directed Trusts

Clients should also consider using directed trusts, which means that trust administration and investment management duties are separate. A frequent arrangement is for clients to designate their accountant or CPA to manage their money and their attorney to manage the trust administration. This arrangement means that you won’t plan yourself out of good clients who will be thrilled with the situation once they see how you are helping them retain more wealth and reduce taxation.

Revocable Trusts

Some clients, particularly those who are elderly or infirm, should consider creating a revocable living trust if there is concern that they may lose the ability to execute future transactions. With a revocable living trust, the client trustee would name an independent person as successor in the event that they become mentally incapacitated or incompetent. The successor would then manage the assets in the trusts on behalf of the trustee. This arrangement can be viewed as a completed gift to that successor even though it is technically held in a trust.

Using Existing Trusts at Year-End

As the year comes to a close and time runs out to complete a new irrevocable trust, gifts may of necessity be made to existing trusts. You may be able divide assets into multiple existing trusts, which might provide the generation-skipping transfer tax exemption to the new gift regardless of the status of the old trust. If you have the necessary authority, you can help your client make a late allocation of generation-skipping transfer tax exemption and create a new 2012 gift to an existing trust. You would then report the 2012 gift on your client’s 2012 tax return and may possibly be able to allocate a portion of the $5.12 million exemption to protect the transferred assets that were named as gifts.


Reducing the size of an estate and therefore its associated taxes, through non-taxable gifts can be a good strategy particularly for seniors and for those who have the resources and are comfortable parting with their money. Clients can give up to $13,000 per year per recipient to an unlimited number of recipients without being subject to gift tax. Recipients can include the children, grandchildren, other relatives, and friends. Your clients can also reduce the size of their estate and avoid taxes by making payments for tuition or medical expenses in any amount for any person, with the stipulation that the payments are made directly to the provider.

Real Estate Gifts

Clients may also want to consider giving gifts of a non-controlling interest in real estate, creating a 2012 gift of value. Clients should seek a certified appraisal or at least a comparative market analysis so that they have an idea of how large the taxable gift might be. Clients should be aware that this will not give the recipient the power to sell the property directly, but it is possible for them to commence a “partition” action, resulting in the sale of the property. Therefore, recipients should be selected with caution. An alternative, if time permits, would be to transfer the property to a limited liability company or limited partnership next year to avoid the possibility of the sale of the property.

Gifts to Family Limited Partnerships

Other gifts may include transferring an interest in a family limited partnership worth no more than $2 million. If the value of the partnership interests is later determined in an IRS audit to be higher, then the percentage transferred will be limited to the percentage that does not exceed $2 million. If the client obtains a preliminary appraisal or comparative market analysis to set the value for the asset and follows up with a formal certified appraisal, this approach may provide some protection from inadvertently triggering a large gift tax.

Loan Forgiveness and Marital Trust Gifts

Clients can also consider the gift of loan forgiveness if they have made interfamily loans. Loan forgiveness can be a quick way to complete a valuable gift without requiring any transfer of funds or creation of new accounts. Clients can simply indicate that the loan is cancelled or forgiven in writing across the face of the note or they can sign a notarized formal document indicated the forgiveness or cancellation of the loan.

Placing marital assets in a qualified terminable interest property marital trust is an option that allows a spouse to gift a surviving spouse with all of their income interest in a marital trust, thus shielding these assets from an array of tax issues. The surviving spouse just needs to sign an appropriate disclaimer and deliver it to the trustee.


An important consideration with gift giving is the impact of age or health concerns on a client’s competency and ability to make informed and sounds financial decisions. In order to bestow gifts, clients must have sufficient competency to execute a contract under applicable state law, which is a higher standard of competency than is required to execute a will. If a client’s competency is questionable, it’s best to involve an attorney in assessing whether or not the client is legally competent to make such decisions.

If a client’s competency is in question, the IRS would have a strong position to negate the gift and include the assets in the client’s estate in a future year when tax laws may be less favorable. Family members may also challenge the gift, particularly those who feel they were shortchanged, in order to get a greater piece of the estate. Without the involvement of an attorney skilled in estate matters, these challenges may generate a host of issues, including family strife and accusations of malpractice.

For clients who lack the necessary competence to give gifts, gift giving can still be an option using a durable power of attorney. This requires careful consideration and review, particularly in states that have strict laws governing gift-giving by an attorney-in-fact. These situations may require appointing a guardian of the property and having the court approve an estate plan, all of which may take more time than is available.

If a client is considering gift giving, it’s best to act sooner rather than later. Recommended actions include revising a revocable trust or executing a power of attorney with broad gift-giving powers, including the power to create trusts, so that year-end estate planning steps can be implemented in a timely manner.


Family limited partnerships and limited liability companies represent other possible approaches to protect client assets and all clients, whether young, old, wealthy, or average appreciate protection. An important feature of limited partnerships is that the partnership agreement can be amended in future years to provide a better tailored approach as changes occur. Also, a limited partnership is not irrevocable, unlike some types of trusts.

Clients can transfer assets, including real estate, securities, business interests, and other assets, into an existing family limited partnership or limited liability company and then gift equity interests in that partnership to the children. Since the value of limited partnership interests is discounted by 40 percent or more for gift and estate tax purposes, this strategy can produce substantial tax savings. Another benefit is that future appreciation of assets is excluded from estate taxes. Transferring the ownership interests through a family limited partnership or a limited liability company is relatively simple and quick. In general, all that is required is an assignment of the equity interests, a revised governing document, and possibly new certificates.

Points to Consider with Limited Partnerships

Clients should exercise caution as there may be estate tax issues if they serve as the general partner, which means that they can make decisions with respect to the partnership. If the client is the person who contributes most of the assets assigned to the partnership and also controls the assets once they are included in the partnership, the valuation discount may be at risk. Clients should also be careful to make distributions on a pro-rata basis based on each partner’s owner interest. Distributions that favor certain partners may result in the IRS interpreting this as an agreement between partners, which opens the door to revoking valuation discounts. Clients should also take care not to create gifts of partnership interests too soon after transferring assets to the partnership so as not to jeopardize the associated valuation discounts.


For accounting professionals that find these tactics attractive and intriguing but a bit complex, this may be a perfect time to become a CPA. Salaries and benefits are more attractive, job security is firmer, and name recognition broadens.

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