The New Tax Act – A Year LaterOn December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “2017 Act”) which, among other items, made several changes to the federal wealth transfer tax system with respect to transfers occurring during calendar years 2018 through 2025.

Here we are, another year older, another year wiser, and with a full year of living under the 2017 Act under our belts. So, what have we learned?

By way of quick reminder, under the 2017 Act, the basic exemption amount was doubled from $5 million to $10 million, which, after being indexed for inflation, is now $11,400,000 for 2019 (or $22,800,000 per married couple). However, the increased exemption amounts are still scheduled to “sunset” or revert on January 1, 2026, to the 2017 levels, as adjusted for inflation.

Review Your Documents.

Based on the number of clients we have seen (and not yet seen) in our practice over the last year, many of you may not have had the time to reach out to your estate planning and tax advisors to review your current wills and estate plan. If you have reviewed your plan, we trust you have satisfied yourself that your current will, perhaps with some tweaks here and there upon the advice of your lawyer, still causes your wealth to be distributed in accordance with your goals and objectives. If this year has gotten away from you before you could review your documents, here is a brief summary of the types of changes that may be made.

  1. Many carefully drafted wills and other estate planning documents are designed to minimize estate taxes through the use of formula provisions that are dependent on the estate tax exemption amount, the GST tax exemption amount, or both. Because of the historically high exemption amounts introduced under the 2017 Act, these formula provisions may produce serious unintended consequences for a person dying between 2018 and 2025, including the possibility of materially altering the intended beneficiaries receiving property under a person’s will.

    For example, assume that a person’s will makes a gift equal to “the largest amount that can pass free of federal estate tax” to his or her children, with the remainder of property given to such person’s spouse, and that person has less than $11,400,000 million of assets passing through his or her will. If this person dies while the 2017 Act is in effect, the children may receive 100% of this person’s property and the surviving spouse may receive no property. Other examples would include wills that have similar formula provisions to make charitable gifts or generation-skipping gifts for grandchildren, before providing for a spouse or children. As much as we advisors work to build flexibility into your estate planning documents, even the best laid plans must be reviewed every five years and certainly after a significant change in the tax law like that made by the 2017 Act.

    We think it is very important that you consider these recent changes in the tax law in connection with your current estate plan and encourage you to review these matters as one of your 2019 New Year’s resolutions. At a minimum, you should be aware of the possible impact of the 2017 Act on your estate plan and should consider what changes, if any, should be made to your will and other estate planning documents.

  1. In addition, the substantially increased estate tax exemption amount may permit the wills of married couples to be simplified. For the past 30+ years, the wills of many clients have included tax-planning provisions creating a so-called “bypass trust” or “family trust” to protect the estate tax exemption of the first spouse to die of a married couple. While there are many non-tax reasons to continue to use such a trust, the increased $11,400,000 estate exemption may enable some married couples to eliminate such a trust and allow assets to be given outright to the surviving spouse.

Time to Make Gifts?

There is also an opportunity to take advantage of these historically high exemption amounts to make lifetime gifts. For individuals who want to make gifts to family members, gifts may be made during 2019 that utilize an individual’s unused $11,400,000 gift tax exemption amount, or $22,800,000 gift tax exemption amount per married couple (taking into account prior gifts). Such a gift may be made outright or in trust, and unused GST exemption may be allocated to a gift into a long-term trust to protect it from future estate and GST taxes. You may also want to leverage these gifts using your gift and GST tax exemption amounts through other estate planning strategies, such as sales of assets to grantor trusts, intra-family loans, grantor retained annuity trusts (GRATs), and split-interest charitable trusts.

Transitions in Family-Owned BusinessesAs we enter what is expected to be the peak decade of baby boomer retirement, the recent 2018 Insights into Family-Owned Business published by the Birmingham Business Journal focused on transitions happening, and expected to happen, in family-owned businesses.  The most significant expectation appears to be that many family-owned firms will be sold during this wave of baby boomer retirement.  This is not an unreasonable forecast based on the number of family-owned businesses in the U.S. and the troubling reality that many owners have not planned adequately for the succession or transition of their business.  Certainly, many family-owned businesses will be sold as part of a well-thought-out plan.  I expect more will be sold as a result of inadequate planning.

I had the opportunity to participate in the Table of Experts for the 2018 Insights issue. We focused much of our discussion on the importance of planning for transition in a family-owned business and challenges faced by families seeking to continue ownership through generations.  If you want the “CliffsNotes” version of the 2018 Insights, I would summarize the key points as follows:  Successful transition, whether that means succession to the next generation, moving to professional management under family ownership or a sale of the business for the maximum return, requires total commitment, continuous planning, unwavering focus and excellent communication.  Easy enough, right?  We also recommend outside help from knowledgeable, experienced, trusted advisors (which should come as no surprise).

I hope you find the 2018 Insights into Family-Owned Business helpful.   Please contact any of the attorneys on our team if you need additional guidance on preparing for the transition of your business.

Maximizing Year-End Charitable GiftsOne impact of the Tax Cuts and Jobs Act (TCJA), signed in to law at the end of 2017, was the doubling of the standard deduction. The TCJA increased the standard deduction to $24,000 for taxpayers filing jointly or for a surviving spouse, $18,000 for a head of household and $12,000 for single filers. As a result, many taxpayers who previously found it advantageous to itemize their deductions on their federal income tax returns no longer do. By one rough, unattributed estimate, 30 percent of taxpayers itemized on their 2017 income tax returns, and that figure may decrease to 8 or 9 percent for 2018!

If you and your tax professional have determined that it is no longer advantageous for you to itemize your deductions, which would include deductions for your charitable contributions, there are still ways to maximize the impact of your year-end charitable gifts.

1. Develop a plan to “bunch” your regular charitable contributions.

If you regularly make a charitable contribution to one or more specific charities every year, consider “bunching” the charitable contributions you would have otherwise made over the next two or more years into this year. Following this strategy could produce aggregate itemized deductions this year in excess of the standard deduction. This may have the effect of generating income tax savings this year that would otherwise have been unavailable had you made the same charitable contributions evenly over the next several years.

For example: Generous John and his spouse, Kind Kim, file jointly and give $12,000 to their church each and every year. After consulting with their tax advisors, John and Kim decide to bunch the contributions they would have made to the church over the next three years by making a gift of $36,000 to the church this year. As a result, and based on their specific tax profile, they produce aggregate itemized deductions in excess of their $24,000 standard deduction. Their tax preparer recommends that they itemize their deductions on this year’s return, which may result in income tax savings to the couple this year that would otherwise have been unavailable. They have also decided to notify the church of their plan to bunch contributions, so the church can plan on a single $36,000 gift this year, rather than the usual $12,000 gift each year.

2. Create a donor advised fund.

If you typically change up the charities you contribute to each year, consider “bunching” the total amount you give annually to create a donor advised fund this year. Once you fund the donor advised fund, you can take your time identifying the charities to receive those funds over the next several years. You will be able to take a charitable deduction for the total amount that you contribute to the donor advised fund this year, and decide later which organizations you want to recommend to receive those funds.

For example: Donor Diane, a single filer, usually makes $6,000 in contributions to charities each year. The charities that she chooses change from year to year based on the needs she sees in her community (and which charities come a-callin’). After consulting with her tax advisor, Diane decides to create a donor advised fund at her local community foundation. She bunches the charitable contributions she would have made over the next five years, and makes a gift to her new donor advised fund of $30,000 this year. Her accountant recommends that she itemize her deductions on this year’s return, which may result in income tax savings for Diane that she would not have received if she kept making $6,000 in gifts each year. As the advisor to her fund, Diane looks forward to selecting charitable organizations to recommend to receive grants from her fund each year.

Note: This strategy also works if you already have a donor advised fund. If you make a regular contribution to your fund each year, you may want to consider “bunching” the contributions you would have otherwise made to your donor advised fund over two or more years into this year.

3. If you are age 70 ½ or older, make a direct rollover of your IRA to charity.

A charitable giving strategy that avoids the impact of the new standard deduction on taxpayers’ use of itemized deductions is a charitable IRA rollover. An individual age 70½ or older can direct the custodian of his or her IRA to distribute up to $100,000 from the IRA directly to charities selected by the individual. This essentially creates a charitable contribution income tax deduction for the IRA owner, because assets of an IRA, if distributed to the IRA owner, constitute taxable income to him or her. By directing an IRA custodian to make gifts directly from your IRA to charities of your choice, such funds are not included the taxpayer’s taxable income. Note, pursuant to federal regulations, a charitable IRA rollover cannot be made to a donor advised fund. Also, it is important that the funds roll directly from the IRA to the charity. If the IRA owner withdraws the funds and then distributes them to the charity, the tax savings are not realized because the funds must be included in the taxpayer’s taxable income.