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Do These Two Things Before 2013


No one knows what is going to happen in 2013, but we know what can be done right now with the current laws in place. If we are forced off the fiscal cliff, your decisions in late 2012 might make for a softer landing.

We’re past the election and it’s time to talk about tax and investment ideas between now and the end of the year. In our world of constant distraction, it’s hard to focus on more than a couple of things at a time, so how about just two — energy investing, and the gift and estate tax.


During the presidential campaigns, energy independence was a popular topic. More specifically let’s focus on investment opportunities that align with the roles oil and natural gas will play in our energy independence going forward.

The advancements in horizontal drilling and fracking technology are allowing us to commercially produce more natural gas and oil deposits. Oil prices have stayed strong while natural gas prices are at historical lows. An interesting way to gain exposure to the oil and gas space is through an investment drilling program. Generally these structures offer two benefits — 1) monthly cash flow, and 2) a large tax deduction.

A drilling fund raises money to drill anywhere from a few wells to a few hundred wells. Once the wells are drilled and producing, investors receive their share of the revenue generated from the sale of oil and gas from the wells. In addition, investors receive a large tax deduction in year one of the investment that can be used to offset ordinary income in 2012. For those in the highest federal bracket, the tax savings as a result of the deduction will result in roughly one-third of the investment back immediately.

The key to investing in these funds is to plan on doing several funds over time. For instance, instead of investing $500,000 in one fund, make five $100,000 investments over the next five years to spread that money over more funds and, ultimately, more oil and gas wells. You don’t want your overall blended return to rely on any one well or any one program. Some funds focus on riskier drilling, but most funds cater to the investor who is largely risk adverse and likes the high probability of success type of drilling.

You can expect to see your money back from a low risk fund in five to seven years with an income stream that lasts anywhere from another five to 20-plus years. Investments are made in these funds around this time of year, after many have determined their income and ensuing tax liability. Circle back around with your accountant and explore this strategy as a way to reduce tax liability and add to your monthly cash flow.

Gift and estate tax

There’s the first tax strategy tip between now and the end of the year, so now let’s discuss the sunset of the gift and estate tax planning opportunities at the end of 2012. Currently, there is a $5.12 million ($10.24 million for a couple) exemption in place for those wanting to set up trusts for the kids, and start moving assets out of their estate. In addition, the top gift tax rate is 35%.

These numbers are set to change on Jan. 1, 2013, when the $5.12 million exemption falls to $1 million (pre-2001 level), and the top gift tax rate jumps to 55%. If you have been thinking about doing some estate planning, procrastinate no further.

For those of you that will go through this process in the last six weeks of the year, keep in mind the valuation discounts that come with gifting a partnership interest. When you gift an illiquid partnership interest, an appraiser may assign a steep discount to that interest because of lack of marketability and lack of control. When you can put these deeply discounted partnership interests in that $5.12 million exemption basket, more assets are able to fit. It works to stretch that exemption.

Also be aware that many people have procrastinated. It’s okay because we still have time, but it is putting an additional work load on appraisers. Appraisers are busier than usual and backed up with work. The hold up won’t be from putting the documents together; it will be finding time on the appraiser’s calendar to get the assets valued that could cause delays.

So, if you are going to take advantage of this higher exemption, make that call to your trusted advisor and cross it off your list. It will feel good to get that accomplished.

Uncertain future

Our president has been decided for the next four years. The focus is now on the impact of higher tax rates and spending cuts. Will we act like lemmings and race over the fiscal cliff as we enter 2013? No one knows what is going to happen, but we know what can be done right now with the current laws in place.

First, there’s an opportunity to transfer a tremendous amount of wealth. Secondly, there are opportunities to invest in domestic energy programs that deliver great tax savings in 2012 as well as a steady monthly income stream for several years to come.

Strap on the parachute made up of a little wealth transfer to the next generation and investment in domestic energy. If we are forced off the fiscal cliff, your decisions in late 2012 might make for a softer landing.

Marshall H. Dean JD, MBA, is a registered representative at Alliance Affiliated Equities Corporation, a FINRA-registered broker/dealer specializing in the evaluation and acquisition of tangible, real asset investments. He invites questions and comments at (913) 428-8278 or marsh@aaeconline.com.

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