This is one of a series of stories looking at potential local effects of the fiscal cliff. Return to naplesnews.com through Wednesday or pick up copies of the Daily News on Sunday, Monday and Tuesday.
NAPLES — For the wealthy in Naples, it's giving time.
Not because it's almost Christmas, but because the U.S. economy soon may jump off the "fiscal cliff," with the Bush-era tax cuts expiring and automatic spending cuts kicking in on Jan. 1.
Now, there's a $5.12 million lifetime tax exemption for gifts. That's set to automatically drop to $1 million in 2013, unless Congress acts by the end of this year.
"Prior to the presidential election, a lot of clients were on the tarmac with engines revving. Now, they are fighting for the runway. They are ready to take off and make the gifts," said Naples attorney Joe Cox, who specializes in estate planning, insurance, trusts and taxation.
He's telling affluent clients to "move property or assets downstream," and recommends they set up irrevocable trusts for heirs, as a way to avoid paying gift and estate taxes.
"When you need your money, you don't do that," he said.
The fiscal cliff is keeping Cox busier than usual, with the record high gift and estate tax exemptions set to run out if there's no compromise between President Obama and the Republicans. Talks are expected to go past Christmas, but could stretch into next year.
"We are swamped," Cox said. "This is the busiest December I've ever had, with the most uncertainty I've seen. I've been doing this more than 40 years."
Yet, he said, it's not as if the world will end Jan. 1 if the U.S. goes over the fiscal cliff with no Congressional action. The higher taxes and spending cuts won't all happen at once.
"It will be a major psychological impact that will cause people to make certain decisions, definitely," Cox said. "But the economic impact will be slower."
The wealthy could face the biggest tax hikes if Obama has his way. Under his plan, those making $1 million a year could pay about $35,000 more in annual taxes, estimates show.
William H. Myers, a partner in Porter Wright Morris & Arthur LLP in Naples, said people are moving their money around because of fears about the fiscal cliff. At least one major bank and trust company in Naples has "basically cut off all transfers, as of Dec. 14," Myers said.
"It's like a herd of elephants stampeding toward the door to get assets out of their estate," he said.
Now, any gifts above the exemption amount face a tax rate of 35 percent. That's slated to rise to 55 percent next year unless Congress acts, Myers said.
Here are a few strategies he recommends to save on estate and gift taxes: Create family limited partnerships and set up grantor-retained annuity trusts, or GRATs, which have become popular with the wealthy as a way to avoid paying a gift tax when giving money made on hedge funds, real estate, stocks and other assets. With GRATs, the giver gets back an annuity, which pays a fixed amount every year.
"The strategic planning has to be done very carefully, with an eye not only toward death taxes, but income taxes as well," Myers said.
James Eastman, founder of wealth-management company Regional Family Offices in Naples, has held a series of financial seminars to help local families understand what he describes as "the gathering storm" that will bring major changes to income and estate tax laws.
"We've had quite a large number of families coming through," he said. "So the level of concern is very high."
At least 60 families have attended the seminars, which have been held three times a week every other week at his offices since October. There are plans to restart them in January.
"You've got a lame-duck Congress," Eastman said. "The easiest thing to do is nothing, but that is dangerous."
With the possibility of big changes to the income tax rules, he said one of the simpler actions investors are taking is to convert large IRAs to Roth IRAs, reducing their exposure to future tax hikes. With Roth IRAs, there are no required minimum distributions, which increase taxable income, and the retirement account grows tax-free.
Many investors are selling stocks and taking their gains now, with the possibility that the tax rate on capital gains will reach as high as 23.8 percent in 2013, up from 15 percent.
"We live in a unique part of the country with the ultra affluent," Eastman said. "I know those folks are doing that kind of thing."
The looming fiscal cliff is one of the reasons Bill Schoen, the longtime board chairman of Naples-based Health Management Associates Inc., recently sold 956,000 shares in the hospital operator, which he held in a trust.
The sale — made Nov. 7 — was valued at more than $7.9 million, according to a filing with the U.S. Securities and Exchange Commission.
"The purpose of the sale was to diversify the holdings of the trust and ... for tax-planning purposes given the expected changes in tax rates as a result of legislation to address the fiscal cliff," said John Merriwether, HMA's vice president for financial relations, in an email. "Bill remains the largest shareholder as an individual."
Schoen's trust still has more than 4.5 million shares in HMA.
There are other worries for wealthy investors. The tax rate on dividends for high-income earners is also set to rise — to as much as 43.4 percent from 15 percent, said Mark Matos, managing director for Global Wealth Consultants LLC in Naples.
"Dividends become much less attractive from a market perspective if we go off the fiscal cliff," he said.
Corporate bonds have become increasingly attractive with so much uncertainty, he said.
With income taxes slated to increase in 2013, some are looking for ways to "accelerate" their income this year, including deferring some expenses, Cox said.
Another tool to avoid higher taxes is to grow investments tax-free inside insurance policies or annuities, he said."That's a next-year tool that will make a comeback," Cox said.
Some are leaving more dollars in money market accounts until there's more certainty about tax and spending policy changes. Or they are putting more money into mutual funds to reduce their risks.
There are concerns the stock market could take a hit from the fiscal cliff, especially if negotiations collapse. Stocks could plummet, threatening economic recovery.
"Politics have become the pre-eminent market force," Matos said. "It's not going to last forever. But for the past three years it has been a pre-eminent market force."
Falling off the fiscal cliff, he's convinced, will trigger a recession, which could bring a 30 percent drop in the stock market.
Robert Matheson, president of Matheson Financial Services in Estero, expects to see even bigger declines in the stock market if there's no action taken by Congress soon. Everyone, rich or poor, will feel the pain if tax breaks aren't extended and a rash of deductions are eliminated, he points out.
"People just don't have any idea what's going on," Matheson said. "So everybody is just going to take it day by day, but eventually it's just going to hit the fan and when it does we are just going to take some pretty big drops in the markets."
Before everything is settled, Matheson predicts the Dow will drop from more than 13,000 to 4,000 points.
He's put more of his clients' money into bonds or money market funds, he said. Inverse funds and precious metals are other draws for investors because of all the political and financial uncertainty.
Andrew Hill, president of Andrew Hill Investment Advisors Inc. in Naples, said investors should be careful not to make decisions based on fear. He said now is actually a good time to invest in the stock market, as others move away from it.
"Usually, the best time to invest in any market is when investor sentiment has moved away from it," Hill said.
He said he's buying back into Apple stock and recommends others do the same.
"Good sales out of the holidays and that stock is gone," Hill said. "Then for those who panicked and sold out a few weeks ago, sorry. What can you do?"