Key Considerations From New Tax Law - Wealth and Estate Planning

Significant changes to the U.S. tax system were made by the Tax Cuts and Jobs Act (TCJA), which was signed into law in late December 2017.  Several provisions of the TCJA will affect wealth and estate planning going forward and necessitate review of current planning.  

While the exact consequence of the TCJA will likely not be known until the IRS has issued regulations and guidance, there are some key considerations to take note of in the wealth and estate planning context:

  • Doubling the Exclusion Amount for Estate, Gift and Generation-Skipping Tax.  The amount that may be excluded from estate, gift and generation-skipping tax has been doubled for 2018-2025 from $5 million to $10 million, indexed for inflation.  For married couples, this change means the total exclusion amount is $20 million, again indexed for inflation.  The manner in which the exclusion amount is indexed has changed to a less generous formula, so it is likely that annual inflationary increases could be rather small.  Nevertheless, it is anticipated that for 2018 the annual exclusion amount will be $11.2 million ($22.4 million for a married couple).  As a practical matter, some estate plans created prior to the TCJA may have provided that the assets equal to the exclusion amount would be put in trust for the next generation while the excess of the exclusion amount would be provided to the surviving spouse.  Given the higher exclusion amount, this formula may need to be revisited, as it could leave a spouse with less than desired.  It is also worth noting that at the end of 2025, the exclusion amount is scheduled to return to its pre-TCJA limit of $5 million, indexed for inflation.  While Congress may choose to extend the TCJA increase in the exclusion amount, it is not guaranteed. 
  • Increase in the Percentage of Income that an Individual May Deduct as a Charitable Contribution.  For charitable gifts made in 2018-2025, the TCJA has provided that an individual may deduct up to 60% of his or her adjusted gross income as opposed to 50% under the previous law.  This change applies to cash gifts to public charities recognized by the IRS as exempt from tax.  To the extent that an individual exceeds this 60% threshold in a given year, the excess may be carried forward and may be deducted in each of the five succeeding years.  The percentage limitation for other types of philanthropic organizations, such as private foundations, did not change.  However, the charitable deduction only applies where a taxpayer itemizes deductions and with the standard deduction nearly doubling (to $24,000 for taxpayers who are married and filing jointly), the effect of the increase to 60% may only be felt by a relatively small amount of taxpayers because many more taxpayers may now choose to take the standard deduction.  The TCJA did not, however, change the law that allows for the avoidance of estate tax otherwise due by donating to a charitable organization.
  • New Deduction Available to “Pass-Through” Entities.  Many family businesses and business entities set up for estate planning purposes elect to pay tax as “pass-through” entities; that is, as opposed paying tax on the organizational level, paying tax on one’s share of profits based on individual tax brackets.  Owners of businesses that are organized as Subchapter S corporations, limited liability companies (LLCs), partnerships and sole proprietorships often elect pass-through tax treatment.  Those electing such tax treatment can now deduct 20% of “qualified business income” subject to certain limitations.  Of particular note, service based businesses, such as healthcare, accounting, consulting, and law, are subject to certain income based phase-out limitations.  The new rules created by the TCJA with regard to pass-through entities are quite complicated and until the IRS provides regulations and guidance, many questions will remain.
  • Other Provisions of Note.  There are various other provisions that touch on topics of interest in the area of wealth and estate planning, including but certainly not limited to the following: (i) alimony and separate maintenance payments will not be deductible based on divorce or separation agreements executed after December 31, 2018; (ii) an increase in the allowable contribution to ABLE accounts (a tax-favored savings program that benefits disabled persons); and (iii) expanded permissible use of funds from 529 plans such that private and religious elementary or secondary school tuition may be paid from 529 plans, subject to certain limitations.

 

This article is for educational purposes only and is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.


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