The Wealth Counselor
Tax Reform: Solutions for Your Clients and Their Estate Planning
In December 2017, Congress passed, and President Trump signed a sweeping tax reform bill commonly known as the Tax Cuts and Jobs Act. This new Act contains several significant changes that will impact your clients and their estate planning.
Estate Tax Changes
These changes open significant opportunities to remove assets from estates and permanently exempt future appreciation of those assets from estate, gift, and GST taxation. Of course, whether tax-driven planning is appropriate for a client depends on many factors. For clients of considerable wealth, now may be the perfect time to implement strategies like a dynasty trust, a spousal lifetime access trust, a domestic asset protection trust, or a charitable remainder trust. For clients whose net worth is less than the exemption, we still must review and possibly revise prior estate plans to ensure that any “old” tax-driven language still achieves the client’s goals. For example, a client with assets of $8 million whose trust uses a formula to allocate assets may have been comfortable with a $5 million credit shelter trust and the $3M balance of their estate going into a marital trust, but may be concerned about funding their entire $8M estate into a creditor shelter trust.
Obviously, estate tax planning is only one aspect of estate planning. Incapacity issues, protecting financially imprudent heirs, asset protection, avoiding probate, and minimizing income taxes are all other aims that can be achieved with proper estate planning. Some clients may mistakenly believe that they do not need estate planning because of the increased exemption. In addition to working with your clients who are affected by the estate tax, we also welcome the opportunity to discuss the many benefits of comprehensive estate planning with any clients who still haven’t moved forward with their planning.
Changes to Individual Taxation
The widening of brackets, rate reductions, and increase in standard deduction are all intended to offset the repeal of the personal exemption. Congress’s intended result is lower effective income tax rates for individuals. The increase in the standard deduction will likely reduce the number of clients who itemize, so tax season in 2019 (when 2018 tax returns are filed) will probably be a little less arduous for many clients. Some good news for advisors is that since less time will need to be spent discussing what can be itemized, more time can be spent on big-picture strategies to build and protect wealth.
The capital gains rate and net investment income tax are unchanged. The top long-term capital gains rate remains at 20 percent, and the net investment income tax rate remains at 3.8 percent.
Like the changes to pass-through businesses (more below), these changes to the standard deduction, brackets, and the personal exemption are in effect from January 1, 2018, through December 31, 2025.
Pass-Through Business Changes
This 20 percent deduction mentioned above is available from January 1, 2018, through December 31, 2025. We should immediately discuss the impact of this new law with any clients that are considering transitioning to or opening a new pass-through business entity. Depending on a client’s goals, the reduction in the C corporation rate (from up to 35 percent to a flat 21 percent) may also make a C corporation a potentially attractive option. Each situation is unique, and we are here to help.
Putting It All Together
Law Offices of J.R. Hastings • 1003 Third Street, San Rafael, California 94901 • 415-450-6692