Changes Affecting Estates and Trusts
The new Tax Cuts & Jobs Act signed by the President on December 22, 2017 contains several key estate and trust provisions. Keep in mind that these changes only apply in 2018 through 2025. Among the changes affecting estate planning are:
- Increased Estate, Gift, and GST Tax Exclusion/Exemption. The new law doubles the estate, gift, and GST tax exclusion amount from $5 million to $10 million for deaths and gifts made in 2018 through 2025. This amount is indexed for inflation.
Planning Note: It may be wise to continue making the $15,000 annual exclusion gifts even though the lifetime exclusion is now $10 million since these changes are only temporary. And as always, gifts of high basis property usually make more sense than gifts of low basis property. In addition, gifts of discounted assets are still very appropriate. It may be wise to revisit your current will or living trust to make sure it still accomplishes your goals. Trusts created under those wills may be very large (i.e. $10,000,000) for those dying in 2018 through 2025.
- Cash Gifts to Public Charities. The new law increases the percentage of a person’s adjusted gross income that they can donate to charity from 50 percent to 60 percent for cash gifts to public charities and certain other organizations. This change applies only to contributions made in 2018 through 2025. As under current law, there is a five-year carryover for unused contribution deductions that are subject to the limitation.
- The Kiddie Tax. The new law temporarily replaces the kiddie tax on unearned income (dividends, interest, rents, royalties, capital gains, etc.) of a child under 18 or a student under age 24 whose earned income is less than or equal to 50 percent of his or her support, with a new tax rate. Under the new rule, the child’s unearned income is taxed using the tax rate tables for estates and trusts for tax years in 2018 through 2025.
Planning Note: The new increased kiddie tax will make planning for children even more complicated than before. A parent or grandparent will need to consider whether it makes more sense to make gifts to a trust for the child since at least the trust can still claim many deductions above the line. In addition, trusts have many other advantages such as creditor protection, longer terms, and tighter controls.
- Qualified Tuition (Section 529) Plans. The Tax Cuts & Jobs Act made a welcome change to qualified tuition programs, commonly known as “529 plans.” Before the change, distributions from a Section 529 plan could not be made tax-free for elementary or secondary school tuition. Therefore, beneficiaries couldn’t receive tax-free distributions for this purpose. The new Act, however, provides that “qualified higher education expenses” now include tuition for elementary or secondary public, private, or religious schools starting in 2018. However, distributions for elementary and secondary school tuition cannot exceed $10,000 for a single student.
Planning Note: Parents and Grandparents should consider increasing gifts to Section 529 plans to cover elementary and secondary tuition. In addition, investment strategies may need to be changed to accommodate the need for distributions sooner than under a college-only plan. Gifts to Section 529 plans have greater tax benefits than other gifts due to the tax free nature of the earnings.
- Miscellaneous Itemized Deductions. The new law temporarily eliminates miscellaneous itemized deductions that would have been subject to the 2% floor in 2018 through 2025. However, estates and trusts may still deduct expenses that would not have been incurred if the property had not been held in trust. This includes tax return preparation fees, trustee fees, fees for fiduciary accountings, most legal fees, appraisals, court costs, and anything else that was uniquely incurred because the property was held in trust. However, in most cases, investment advisory fees are no longer deductible unless they uniquely incurred because the property is held in trust.
Planning Note: It will be more important than ever before for trustees to adequately document how and why investment management or advisory fees paid by the trust may differ from those commonly incurred by individuals.
- Pass-Through Entities Owned by an Estate or Trust. For tax years in 2018 through 2025 an estate or trust can deduct 20% of the lesser of a) its share of qualified business income from a pass-through entity (partnership, S corporation, or sole proprietorship) it owns or b) its taxable income. Presumably it can pass this deduction through to the beneficiaries if it makes distributions. However, whether and how it does this will need to be clarified in future regulations.