Wealthy Americans have been living in "tax la-la land" for the past decade and now they face the sober reality that their taxes could revert to pre-Bush era levels at year-end, says Katherine Nixon, Northern Trust's chief investment officer for personal financial services.

Strategic planning is critical, she said during a presentation yesterday, adding that uncertainty about the post-election lame duck session of Congress makes planning for this year, let alone for the longer term, difficult.

Nixon set out Northern Trust's "best guess" of what will result from negotiations between the White House and the House of Representatives regarding the so-called fiscal cliff. It's too early to assume a grand bargain will result, she said. As for the Bush tax cuts, Northern Trust thinks a one-year stopgap extension will be granted to low- and moderate-income taxpayers. Higher earners, however, can expect the tax cuts to expire.

In addition, estate tax laws will be allowed to sunset on December 31, and then retroactively addressed sometime in 2013. Added to this, wealthier taxpayers will be hit with a 3.8% Medicare contribution tax on net investment income as of January 1.

Nixon said it is likely that the payroll tax cut will not be extended during the lame duck session. An AMT patch, on the other hand, is likely because many lower income people would be adversely affected without one.

"This is an excellent time for tax planning," Nixon said. "You can't expect that tax provisions will be more favorable in 2013 than they this year."

Suzanne Shier, director of wealth planning and tax strategy at Northern Trust, agreed. "Taxpayers don't like uncertainty," she said. In a fluid tax environment, it's critical to stay informed and focused on core wealth transfer objective during the transition to 2013, she said.

Shier suggested several wealth planning strategies clients might consider:

Use the high gift tax exclusion level to forgive family loans when repayment is no longer desired or realistic.

Use the exclusion to equalize gifts among family members, or make a gift to a life partner.

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