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On-Demand: Tax Cuts & Jobs Act | Impact on Individuals, Trusts and Estates

Oct 29, 2018

This webinar provides updates on recent IRS guidance as well as possible ways to address the Act’s impact on international tax.


Barbara Taibi: Good afternoon, everyone. This is Barbara Taibi. Thank you for joining us for the Tax Cuts and Jobs Act Impact on Individuals, Trusts, and Estates. Just want to let you know that this is the first of a series of five webinars that we are offering. The next one is going to be Wednesday, and that will be on the Section 199A. If you have not signed up for some of the others and you'd like to, it's going to be on our website. After the end of this session when you receive your thank you for participating, the link is also going to be included, so you can sign up for future webinars that we'll have the end of this week and early next week. Let's get started on the individual portion of this program.

Barbara Taibi: First slide, I think we're starting to get very familiar with this. This is the 2018 change in rates. A few things I want to point out on this slide. The first is that I need you to remember anything I speak about in this individual session is really going to apply for the years 2018 through 2025 only. Unless I say differently, these are temporary changes that we're speaking to, which is different than the corporate change that you'll hear about a few days from now and also when we talk about the change in rate for corporations. That is a permanent change that was made by the Tax Cuts and Jobs Act.

Third, you can see on this slide we've got a column to the far right on estates and trusts. Need you to remember there that that's the same schedule that the new kiddie tax rules will be following. If you're doing returns for minor children with income, you no longer have to care about what the parents' situation is or what the other siblings have. You can file those returns, and you're just basically paying based on the same schedule as trusts and estates. Lastly, I think the big change we're talking to is the reduction in the top individual tax rate from 39.6% down to 37%. That's about a 2.6% decrease. Along with that we've got the elimination of the Pease, which used to be a haircut you took on your itemized deductions, which I'll speak about later. The real reduction is about 3.8% on the top tax rate. While we're on the subject of 3.8%, I just also need you to remember that the 3.8% tax on net investment income is still in play. That has not been eliminated.

In this chart, just a comparison of '17 to '18. You can see that there's a lot more income that's going to be taxed at the lower brackets, the 35% and 37%. At around $400,000 of taxable income, those people got a slight increase. They are going from 33% up to 35% now. The best benefit is down at about the $156,000 income level because they went from a 28% down to 22% bracket. This is where we're seeing some good results with our wealthy clients because this reduction at the top rate of the 2.6% is really offsetting the bad news of the limit on the itemized deductions that we're going to have. In a lot of cases for people, that benefit at the top end is actually helping them, so the result is not as bad as originally thought.

When we talk about capital gains with the new tax law, the only difference here, we've kept long-term capital gains at 0%, 15%, and 20%, but they didn't align the capital gains increases from 15% to 20% with the new bracket changes. Where under the old law it was easy, we'd be able to say, "Well, once you hit the 39.6%, you're going to 20% with long-term capital gains," that's no longer the case. Now you're going to have situations where people are paying 20% on long-term gains and qualified dividends even though they're still only going to be taxed at the 35% bracket, not just the 37% bracket. Again, the reminder that we do still have the 3.8% tax on net investment income.

What I wanted to show in this slide is there's talk about the marriage penalty and how that's been helped a little bit by the Tax Act. The marriage penalty really is somewhat gone in the first five brackets, the low brackets, but we do still have a marriage penalty when it comes to tax rates up at the 35% and the 37%, the most being you can see at that 37% because if we look to this lower rate, let's go down to the 12% bracket. If you're single on the left-hand side, you're at 38.7%. Twice that is the 77.4%. Those rates, they all make sense. It's double for married. When you get up to that top bracket, you're only hitting that if you're single and you make more than $500,000. If you're married, you're hitting that and you make more than $600,000. That's clearly not twice the amount.

Even though these brackets are similar in the lower levels, we still have a bit of a marriage penalty in other areas like the limit for state and local tax is $10,000 whether you're married or you're single. The mortgage interest limits are the same. What you have for capital loss carryovers are the same. The net investment income tax threshold is not twice for a married couple. The marriage penalty is alive and well.

Alternative minimum tax, I think we all know what that is. There was, again, a lot of discussion on the changes here. The big change in AMT for 2018 through '25 is really where the phaseout of being hit with AMT occurs. You can see that for a married filing joint tax return, it goes from $160,900 up to $1 million in 2018. What that really means is there should be a lot less people that are in AMT. For this reason and also for the reason of that two of the largest add backs for AMT that we used to have, which is state and local tax and miscellaneous deductions, are both going away too, as we'll speak to in a few minutes. I think what you need to really concentrate on here when you're looking at your own or your clients' is that the AMT portion of this is also something that will probably alleviate a little bit of the pain of some of the other changes that we have to deal with, but it all has to be done together.

When it comes to child and family tax credits, big news here is the doubling of the credit for each child from $1,000 to $2,000, and also, again, the phaseout. This used to be something that would start to be eliminated at $110,000 of income. That's been now moved up to $400,000. You can see how this is really helping working families. $110,000 in this area with two working people, typically many young couples were exceeding that amount. $400,000, that's a pretty good number for two working people to still be able to get the $2,000 credit per child and also $500 if there are other family members that you're caring for in the household. Of that $2,000 child credit, $1,400 is refundable. That means even if you file a tax return where there is no tax due, you'd put the credit in and you'd be able to get that $1,400 per child back.

Educational provisions, there were a lot of things that were going to happen but they didn't. The only thing I want to talk about here is that 529 plans, now you can have distributions up to $10,000 a year that could be used for qualified expenses for elementary and high school. They brought that down to the lower grades. That's public, private, or religious studies it can be used for. The only other point I want you to remember here is that when you put money, contributions, into a 529, that's a gift. You have to keep that in mind that if you put money into it, it's going to count against your $15,000 annual exclusions amounts.

The next few charts I have, some areas we've gone through already, but it's good for you to have these as a resource as you move forward into this year's tax filing season. We talked about the ordinary income brackets. The inflation adjustments that I have here, this is the one area where it is a permanent change. The government is going to a Chained Consumer Price Index to base inflation adjustments on, not the Consumer Price Index measurement that we have been using. What that really means for us is that more people are going to be moving into the higher tax brackets sooner. It was a way that they were going to get more money into this budget quicker, which they needed to do when this was getting passed.

Tax-exempt bond treatment, again, there was a lot of back and forth on that, but everything remained in place. It's still tax-exempt for federal. If it's from your state, it's exempt for state. The only did make some changes when it comes to issuers of muni bonds because they didn't want them to have the ability to refinance equity debt into tax-free debt. Normally that's stayed the same.

Like-kind exchanges, they have basically been eliminated except for they are allowed for exchanges of real property that was not held primarily for sale. If you have a piece of machinery that you typically were trading in and buying something similar, that used to count. You deferred the gain. Now you'd have to treat that as a sale and pick up the gain on that trade-in when it happens.

Long-term capital gains, I think we've talked enough about that. The Affordable Care Act, just to keep in mind that that .9% Medicare surtax remains in effect for modified adjusted gross incomes over $250 and $200. That has not gone away. What they were using this year for was to repeal the individual mandate, the individual responsibility payment that people had to pay in on their return if they weren't properly insured. They gave us this year for everybody to figure out what they were going to do. Effective 1/1/19, this mandate has been eliminated.

I'm going to skip the NT piece and move on to carried interest. Carried interest is the way the income for a lot of people that deal with our private equity and hedge fund world generate their income. A lot of it is treated as capital gain, which has always been a discussion because it has a lot of the characteristics of ordinary income. The change is that they did keep the preferential capital gain treatment for this carried interest, but they extended the holding period. You would have to hold the assets for at least three years in order to get the long-term capital gain treatment on the sale.

The next big piece is the standard deduction. They have doubled the standard deduction. That's the numbers I'm showing you there in '18. Alongside of that, they've repealed the personal exemption. What plays out is that let's say in 2017 you would have had your $12,000 standard deduction if you were married filing jointly, and you would have had $8,000 and two personal exemptions about. That's $20,000. Now they're saying, "All right, you don't get that. We're going to give you $24,000, but we are limiting your state and local real estate taxes and your miscellaneous deductions to give you this extra $4,000." That's a way it's working out.

One thing to think about with the loss of the personal exemptions is maybe you've got an older child living at home that's working part-time while they're going to school. If it's possible, let them file their own return. This way they can earn up to $12,000 and get that tax-free because they'd have $12,000 of income. They're going to get the $12,000 standard deduction no matter what. That's zero income that will be reported, which would probably be more beneficial to them. Think about that when doing returns this year.

We've talked about the child tax credit already. They have repealed the casualty and theft loss rules except when it's a federally declared disaster area. Make sure you have your jewelry, your art, your collectibles properly insured now to help you out if there's a flood, or a fire, or something else you need to worry about.

The big area are our modifications to itemized deductions. What everybody is talking about is the state and local tax deduction. Now we are limited to $10,000 in property tax and state and local tax. That's a big hit to us in the high tax states, but that is where it is. It's $5,000 if you're married filing separately. Please note though that this does pertain to your individual taxes. This is on your personal Schedule A. It doesn't include trade or business or Section 223 investment activities if you've got additional local tax and property taxes paid there, but your personal piece is limited to $10,000.

On the mortgage interest deduction side, we used to be able to get up to $1.1 million of principle, and you can take that and any interest on it for the first or second home would be tax deductible as qualified mortgage interest. That is now lowered to $750,000 of acquisition indebtedness. The one thing that did come out here a few months after is at first we were concerned that home equity debt was gone completely, but they later defined that to say that home equity indebtedness still within this $750,000 limit is okay as long as it's secured by the first or second home and used to remodel or improve the residence.

Charitable contributions, only change here is that they've added a fourth category or a limit. We've got a 20% limit, 30% limit, cash to public charities was 50%. Now they've upped that to 60% if it's cash only. That means if you give $1 of non-cash contribution to Salvation Army or any kind of clothing or something, that's it. You're back down to 50%. You can only have cash contributions in the year that you're going to try to claim 60% of your adjusted gross income as a charitable contribution. This cash contribution has to go to a public charity not for the use of a public charity.

Medical expenses, we have two years to only have to get over a 7.5% of adjusted gross income threshold. Then we will all need to get over a 10% of AGI threshold to take our medical expense. Job expenses and miscellaneous deductions, they're gone. The 2% of miscellaneous deductions have been repealed. That's your tax prep fees, your investment fees, your legal fees, non-reimbursed business expenses, gone.

Changes in alimony, and this is another area where it's coming into effect for January 1 of '19, they gave us a year to figure this out because people were in the midst of divorces. For a divorce finalized in '19, any alimony paid is no longer deductible, and alimony received is no longer considered an income. Moving expense is repealed. The Pease limitation, remember that where if you hit a certain amount of income, you had to look at your itemized deductions and then take a haircut on a certain piece of those. That is gone. At least for whatever deductions we have left, you're going to get 100% of them.

In retirement plans, again, an area where we were concerned there'd be big changes, but they really left that alone with the exception of the ability to recharacterize or undo a Roth conversion. If you took your amounts in a traditional IRA and decided you were going to convert it to a Roth, you'd typically pay tax on that conversion. If you found out down the road when it was time to pay the tax that maybe that wasn't the smartest thing to do, you could basically unwind it and recharacterize it. You're no longer going to have that ability. We need to really think of Roths and a conversion to a Roth as a long-term strategic move because it won't be reversible. We've talked about the education changes and just the sunset. Again, to reiterate, what I've talked about is for 2018 through 2025 only. Now we'll have our first polling question. The top individual income tax rates for 2018 have A, increased, B, decreased, C, stayed the same. We're going to give you a couple seconds to answer.
Moderator: Please remember that in order to receive your CPE certificate, you must remain logged on for at least 50 minutes and respond to at least three polling questions. We're going to give you a few more seconds to answer. We are now closing our polling question, sharing the results.
Barbara Taibi: How does it look? The answer is B, decreased. Okay, move on? Okay. We're going to move on to talking a little bit about pass-throughs. Again, I want to say that we're having a full hour of this on Wednesday with Allyson Milbrod and Jeff Kelson who are the king and queen of Section 199A. I just want to give you a little bit of a background on this for those of you that might miss that, but you don't want to miss that one on Wednesday.

In a nutshell, for years beginning after 2017, there's going to be a 20% deduction for taxpayers who have qualified business income. That's the income from their pass-through entities, partnerships, S corps, sole proprietorships. This was a way that they were trying to even the playing field. After they did the corporate tax reduction to 21%, we knew we had to do something because if you were an owner or a partner in a pass-through, you would probably be paying at your top 37%. That didn't seem fair. Here's the solution they came up with, which is this 20% deduction. That 20% deduction is further limited to the greater of 50% of your W-2 wages or 25% of your W-2 wages paid plus 2.5% of the adjusted basis on all qualified property.

By adding this second bullet point here, which is the 25% of wages and the 2.5%, they were able to bring in a lot of our real estate partnerships, REITs and PTPs that deal in real estate, which typically don't have wages but certainly have a lot of property. This limitation doesn't apply for incomes below $157,500 if single or $315,000 if joint. That means you will get this 20% regardless. You don't have to go through this additional test if you are under those levels. The caveat in all this is the specified personal service businesses. These businesses include law, accounting, financial services, consulting, but they did take out architects and engineers as not being part of this service group. Why you don't want to be considered a specified personal service business is because this 20% deduction for qualified business income is only going to be allowed if your taxable income is below $315,000 if married and $157,500 if single.

What they'll talk about on Wednesday is that proposed regs did come out a few months after the passing of the Tax Act. They really made it much clearer as to who's going to fall into this category. It was a favorable reply on the catch all that they have, and who will be part of this, they've narrowed it. I think a lot more people and a lot more businesses are going to be able to take advantage of the QBI deduction than we originally were thinking. It's a big hit. If you are over these levels, let's say you're in that phaseout period, which is the next $100,000, as I have in bullet point three, it costs you a lot because if you're at say $415,000, you're losing 20% on the $315,000, so it's costing you tax on another $63,000 of income just to make another $100,000. It's important to see how we're going to be able to play with some of these rules.

I have a quick example here. Take it and look at it more closely on your own time. It's walking you through a situation where you have to take the limits, look at what you're QBI income is, and then apply the two limitations to it. Then you'll come up with what your answer should be on how much is going to be allowed. Then you have to further look at your final amount being limited to either 20% of your taxable income, which doesn't include your capital gains. The other thing on the new law with losses is there's an excess business loss, which is the aggregate of your pass-through entity income, and deductions, and then the threshold amount of $500,000 for married couples and $250,000 for others. You're going to be limited to a loss on that each year, and the remainder can be carried over.

This is an example showing that, again, for a couple that has the situation where they've got pass-through entities. In this case, again, I need you to do this on your own time, but it's going to show you the results being that they now have taxable income of $200,000 where in 2017 these same facts would've given them a tax loss of $150,000. That's a $350,000 swing. Some planning ideas that are important, the state tax deduction limitation is there. They tried some workarounds in different states, but so far it's been shut down. I guess stay tuned when it comes to that.

Mortgage interest, because of the lower amount, the $750, a few things that you've got to be careful about would be refinancing because if you really change the terms of your new loan, you can now be subject to the $750,000 limit if yours was over that. Consider mortgage debt. If you've got a smaller mortgage, in my example I've got $200,000, you're paying 4%, you've got $8,000 in mortgage interest, you've got another $10,000 in your state and local tax limit, that's $18,000. Well, you're going to be getting $24,000 as a standard deduction anyway, so you're not really getting any benefit. Maybe you think about paying that mortgage off.

Another big area that we're talking about is bundling charitable and medical. You can itemize every other year and take advantage of the standard deduction. Using donor-advised funds could be something that's really important in this area because you can put your charitable contribution into a donor-advised fund in year one, take the charitable contribution deduction, and then use your standard deduction the next year when you would be able to pay out from that donor-advised fund because if Jack and I have a client, and say they've got $100,000 of income and they want to give $10,000 to charity, what are they getting for that? Well, really nothing if they're under the standard limit. We need to look to the bundling. We need to look to if they're over 70 and a half.

Maybe it makes sense for them to use their RMD to pay the charity directly because then it's not an income and it's not going to be a deduction, but the distribution out is not income. Maybe a simple trust gets that up where you put $200,000 in. Say you earn $10,000 of income. You pay out $10,000 to the charity. The trust pays no tax, and you get the benefit of it there. An example of bundling, we're talking about if you typically give $5,000 a year and you have $19,000 in other deductions, you're going to have $24,000, which you get anyway. You're not getting the benefit of the money you're giving to charity. If you combine three years of charity into one, you'd be giving $5,000 times three or $15,000 to charity. You'd have $19,000 for mortgage interest, so you're getting a $34,000 itemized deduction. You are getting the benefit.

Lastly, just when it comes to large charitable contribution carryovers, just look at this example because if you have a charitable contribution carryover and you're using this standard deduction, it is eating into this carryover. It's almost treating the carryover as if you were able to use it, so you'll be eating away at that. It's important to take a look at that when you're doing your tax planning.

A few other considerations, most we've talked about. I think we're going to be spending a lot of time seeing what income level our clients are at, if we have a limitation on our QBI or not. We're going to be spending a lot of time looking at retirement plans and what assets can go in the plans to defer the taxability of that income. I think entity choice is going to be huge between if it should be a C corp or a pass-through, remembering that Section 179 changes have occurred, bonus depreciation has changed. We've talked about charity and medical. We've talked about IRA contributions. Remember to keep those as a possible plan.

The last bullet point here is not really something new with tax law, but they did put the adequate substantiation rules for contributions, they've made those final and what you do have to have in order to get the contribution. Pay attention to those if you have clients that are giving unusual or larger contributions. Now we'll go to our second polling question. What area of the tax reform bill do you think will require the most analysis to fully understand, A, corporate tax rate, B, what makes up qualified business income, or C, how high net-worth families will fare under tax reform?
Moderator: Please remember that in order to receive your CPE certificate, you must remain logged on for at least 50 minutes and respond to at least three polling questions. We'll just give you some more seconds to respond to that question here. All right, you have 10 more seconds.
Barbara Taibi: I can't see the answer, but my opinion is B. What do you think, Jack?
Jack Meola: B.
Barbara Taibi: B? Definitely, qualified business income and what it is is the biggest piece. All right. Go ahead.
Moderator: We'll just close the results.
Barbara Taibi: Okay. These are just some examples that you can also look through in what we're seeing with different families and different areas, and just how you're no longer going to do a back of the napkin calculation for taxes any longer because it's just all over the place. I wanted you to have the latest draft of what the supposedly postcard 1040 is going to look like because this postcard is in just new forms five different schedules. I didn't even include all the forms that we already have which will be part of this. So, yay for tax simplification. Now we'll move it on to Jack.

Jack Meola: Good afternoon, everybody. This is Jack Meola. What I'm going to talk about is estate planning under the Tax Cut and Jobs Act. Changes brought about in this area was an exemption that originally we thought would be at $11,200,000. The exemption amount previously was $5,600,000. We thought a doubling of that would make it $11,200,000. The law sunsets, which means that absent further congressional action, the exemption would revert to the $5 million basically, which was set in 2012, and goes up by the index. The index that we had before made the number $5,600,000. Now with what Barbara talked about, the Chained CPI, the base went up lower, and the exemption amount then came to $11,180,000. What you can see is exemptions are going to go up slower, which means that your taxes will increase at a faster pace than they would have under the old CPI results. What's the most surprising about the tax law is that we were going to get a step-up in tax basis. That was thought to have been lost, but it's not. Much of the planning revolves around utilization of the step-up in basis. Some of the ideas that I want to bring to you this afternoon.

Unanticipated impact on existing documents, you might think this is a broken record because every time the exemption went up, we talked about running back to look at what the results would be with the increased exemption. Normally you have a marital portion of a trust and under a will and a bypass portion. Depending on the exact language, you can have vastly different results now because of the substantial increase in the exemption. For example, if we utilize a credit shelter trust to the full extent available, and that is the language, you may be funding a credit shelter trust with $11,180,000 and leaving nothing for a marital trust portion, and therefore a surviving spouse with no assets coming from the deceased spouse. I don't think that's what you would want. I don't think most people would want that result, and therefore it's imperative that you go back and look at the language in the planning document to ascertain exactly what would happen. This has to be done under the backdrop of the fact that in 2025 this may not be available either.

The problem also stems from the fact that what we think is permanent and not permanent in tax law is probably illusory because we could possibly have a new president that could revise the exemption in the year 2021. We could have some congressional changes that come about currently that may have some effect. We can have in 2025 a new president could sign a bill decreasing the exemption. In 2026, the increased estate exemption is to sunset. Again, this estate exemption is not just for estate taxes, it's for gift taxes, and it is in parallel with generation skipping taxes, which is the tax when you attempt to bypass a generation and not pay tax at that first generation level. The only comfort that I can bring in this discussion is that we have never had a reduction of the exemption in the past, but that's not to say with the discord that's going on in Congress at this point in time and on the political landscape that we may not have something more radical and a reduction.

The question is, is it worthwhile to make gifts transfers now? I think the weighing is an asset protection versus income taxes versus estate taxes. That's the constant that you have to think about because is it worthwhile to protect assets, protect from divorce, protect from litigation, and use the spend provisions that could likely benefit you in the litigious society we live in, as compared to getting a basis that step-up upon death. Consideration of having these assets that are includible in the estate and getting a full step-up in basis is the weighing. Also, the estate tax that has to be paid with the inclusion of assets at their full fair market value at death. Is it worthwhile to give away those assets during lifetime and not get the step-up in basis but to avoid the appreciation on those assets from being includible in the estate?

The consideration going into a trust or establishing a trust is contra. If you look at the second point on the slide, we are also looking at breaking existing trust because we want those assets included in the estate because we're not going to have an estate tax. Some of the ways to "break" that trust is to use some non-judicial modifications, decanting, decanting to another trust. It depends upon the power. That goes into very specific provisions that are included within the drafting of the document. The potential here is weighing towards income tax where you feel comfortable you're not going to have an estate tax, and you feel comfortable that an attack upon the existing trust is not necessary for that asset protection. If you have asset protection, you may just want to decant it or use some non-judicial modification so that you keep it in trust and keep the asset protection. All ongoing decisions that have to be made in your planning.

Making gifts to existing or new irrevocable trusts. We have this past year looked at the application of the GST for many of our wealthy clients. One of the techniques that we utilized this year in 2017 filings was to actually file late gift tax returns and to utilize the GST exemption. I know what you're thinking. You're saying, "Well, wait a second, Jack. You're telling us these provisions apply for 2018 and the increase in the exemption." However, if you file a late GST exemption allocation of the exemption, you're able to use the exemption amount that exists at the date you make that election. That would be to allow you to use the 2018 GST allocation exemption amounts to a trust that it's existence and have been filed on a late file 2017 gift tax return. This was one of the things that we had looked at because we wanted to utilize this increase in exemption where we thought we would utilize lower amounts in prior years for other assets. We really upped the amount of the GST exemption allocation to a number of trusts.

Some of the other considerations, leveraging gift to support funding life insurance, and to avoid gifts in the future, maybe putting in income generating asset. Before we may not have wanted to do that because we'd be using up too much exemption. Now with the exemption increase, we wanted to utilize that exemption because we don't know how long it will be around, and we do not believe that there should be a clawback if a reduction in the exemption comes about. Taking advantage in your planning to be able to fund life insurance trusts and not make future gifts may be part of the consideration that you want to do.

Of course all of this revolves around how much distributions are going to be made to beneficiaries. Large distributions out to beneficiaries, when and how much makes a determination on whether or not you're going to get the asset protection that you need. The balance here is how much is needed. If your beneficiaries don't need the assets, clearly asset protection and transfers to trusts is a series consideration.

Clients that are concerned with the estate tax, one of course important consideration is loss of step-up in basis. If you have extremely low basis assets, how do you get our cake and eat it, too? Getting low basis, for example, assets out of a trust and to a donor using possibly a substitution power may be available. Therefore, upon the donor's death, possibly get a step-up in basis of the asset, number one, transfer low basis assets to the donor who died, and high basis assets or cash to the trust, who in turn can acquire other assets in growth, all subject to exemption from estate tax and possible GST taxes also. That planning is serious consideration.

One of the next things is the assets under consideration, are they going to be sold likely right after the death of the donor? Are the assets business assets, because even if you're not going to sell the assets, if the assets are business assets, let's say a family partnership that has an operating business, the step-up in tax basis is a substantial tax benefit for the income taxes. Clearly you want to make sure that you can get a step-up in basis for those type of assets. Those that will not likely be sold you may consider other alternatives, but if it's a business assets, you may want to definitely get a step-up in basis. If there's a reasonable prospect of sale after death, clearly the benefits of trying to save on estate taxes can be nullified in a family setting where the assets are quickly sold after death of the donor, and effectively no step-up in basis.

As a further consideration, one of the things you have to remember is that if you wait till the estate tax upon death, you are effectively tax-inclusive. That means that the assets to pay the federal estate taxes are coming out of the total estate that you're being taxed on and utilized to pay those taxes, whereas a gift you only pay taxes on the net amount of the gift that is transferred to the beneficiary. The gift tax is not included with the total gift tax calculation, and therefore is deemed tax-exclusive. If you're going to make a decision strictly on gift tax versus estate tax, it is always better to make the gift and utilize the gift tax because of that inclusion/exclusion concept.

Is it better to do a sale, and if death would occur, revoke the power of a grantor trust before death or possibly make a distribution using a substitution power? You need to make sure that if you do these types of techniques, you do them properly. The failure to do a substitution power properly, we've been involved with a case that was going to court that the trustees failed to exercise the substitution power properly. It was deemed by court to not have been followed, and therefore the planning went awry because they couldn't utilize the substitution power properly and included assets in the estate that should not have been included if proper planning was done.

I'm going to go to polling question number three. Will the new increased estate tax exemption trigger making additional gifts by you and your clients, A, no change, B, minimally, C, moderately, D, my phone will be ringing endlessly, E, there will be an initial increase and then subside.
Moderator: Please remember that in order to receive your CPE certificate, you must remain logged on for at least 50 minutes and respond to at least three polling questions. I'll give you a few more seconds to respond.
Okay, we're now closing the poll and sharing the results.
Barbara Taibi: All right. C won, moderately.
Jack Meola: That's probably in line, moderately, but I would tell you that I've been encouraging clients in the right circumstances to make gifts, and they have responded fairly aggressively. They believe that this may be an opportunity that they do not want to lose. That seems to be my anecdotal answer to that polling question.

Promised to talk about some other techniques and considerations. We're running at time table here of possibly losing these exemptions. Consideration for a seven-year GRAT. I utilize that because effectively by the end of the 2025 the exemption amount may go away. If we can utilize this, a GRAT for seven years, and it's successful, we could have passed to our heirs assets that have appreciated in value for a very low use of the exemption amount. If death occurs during the GRAT period, there's an inclusion. I'm not going to go into how much has to be included, but for the most part a good part of the assets would be includible in the estate, and therefore the idea that you still have your exemption left may ameliorate the situation, again, if you live the full seven years of the GRAT, which is still a statutory provision to which the government can't argue that you did not follow the rules properly because it was set up to give you the benefit if you do it right of all of the appreciation being removed if you survive the seven years.

What we're also seeing is life insurance strategies. Previously we bought life insurance through life insurance trusts that were exempt from estate taxes. We would make gifts of the premiums each and every year. This was so that there were liquid assets to pay estate taxes upon the death of the husband, wife, or the survivor of the two. Now we have to consider whether or not we want to keep the life insurance. Is it something worthwhile? The full analysis of the life insurance is necessary because oftentimes now the primary reason for having acquired that life insurance will now have dissipated with the increased exemptions. On the other side of the coin, we may lose these exemption, and is it worthwhile to keep the life insurance in place, or is it worthwhile to make larger gifts to the life insurance trust so that if the exemptions go away, we're fully funded and no future gifts have to be made.

In addition, do you need to keep making the premium payment? That's another weighing that has to go on because if you don't, there may be a reduction in the death benefits and no ability to maybe true up later on to get the increased face value of the life insurance that you had previously. A lot of weighing going on with that, as well as what kind of insurance it is. If you are some type of universal life insurance whereby each year the mortality charges go up, the amount of gift in the future should the donor or the insured survive will clearly be an additional cost. Some consideration for funding now may be something that you really have to consider, and are the assets available to do so.

Another technique is the split dollar economic benefits. One of the downsides to utilizing a split dollar policy whereby you pay low amounts and the economic benefit was the gift and the inclusion of income, but for the donor insured, here the backdrop of that was that it was not always favorable because you had a closely held corporation and it may be subject to a tax rate that is non-deductible life insurance. At a 21% corporate tax rate, this may be a more beneficial way of trying to fund life insurance. If you have analyzed the situation for your client and determined that you want life insurance, it may be a cheaper way to go utilizing the split dollar economic benefit and the 21% corporate tax rate.

One of the other techniques, and I don't have it on my outline, that I want to discuss that has been really brought up is possibly utilization of what we call upstream gifts. That's a gift to a parent or a placing of assets in a trust by a parent whereby those assets can be stepped up in basis because the parent has a general power of appointment over those assets. Of course in any family situation, if you're going to utilize this technique, you better make sure that you trust your parent not to make a general power and utilize that general power to put the asset somewhere other than where you would want to have them. If the family situation is correct, a testamentary power of appointment of the assets in a trust that would be includible because they have the right to control those assets, a step up in basis utilizing a parent's full exemption that remains could be possibly $11,180,000 currently. If it was combined with two parents, it could be over $22 million. It can get a step up in basis and not utilize the assets of the person who's generating most of the assets, the child of the parent who's now created these trusts.

This is becoming more and more popular. There is a number of considerations that have to be thought about with these things such as if the assets come about within one back to the donor who made the gift of assets, those assets do not get a step up in basis if death occurred within one year. It would be easy for me to give to a dying person assets, get a step up in basis when they promise to return those assets to me. There is a provision under Section 1014E that prohibits that. But there's workarounds that are available to avoid having the 1014E provisions apply, and therefore allow you to get a step up in basis. Just be careful with this. Again, right family situation, a great technique to consider to utilize. One of the considerations for 1014E is that appreciated asset has to have been gifted, number one, and that it has to be by way of a gift. Techniques such as sale to a trust may be avoidance of the 1014E provisions, or if cash is put into a trust that's not appreciated, that may be an avoidance or a workaround to the 1014E provisions.
What we originally thought was that people may start to look at whether or not there should be changes in the investment strategy using treasury bills, notes, and bonds become more favorable, but we have not seen that. Luckily, that is the case because what we had this past year is a tremendous increase in the equity and the stock market. Equity investments clearly outpaced any downside that would occur through either income tax savings or any type of other planning. I think the idea that we thought at first maybe people would utilize some treasury bills, notes, bonds because the state taxes were not going to be available, I think that that has not come about. The idea of movement to lower tax jurisdictions is still in play. The use of decanting to move assets to a Delaware trust or a trust that do not incur income taxes is clearly a favorable item that is serious for consider.

When the new law came about, we were also fearful on whether or not trusts would be entitled to professional fees and would be limited based on what Barbara had talked about before. A number of the itemized deductions are parallel between an individual and a trust. Under Section 67E, we were fearful that we may lose those deductions. Well, at least in clarification by the government, any professional fees that are incurred that are unique to a trust continue to be deductible. That's a clear sign that there are some items that are still deductible for a trust. Clearly anything like investment advice is subject to substantial restriction in fact are eliminated. There may be carve-outs that can be made. That will have to be explored as people look to the fact that large deductions have been eliminated under the new law.

Also, we're going to look at timing. The 645 election is when you have a revocable trust. That revocable trust is includible in the estate, clearly making an election to utilize the year end of the estate so that the trust now has a bifurcated year and will end with the year end of the estate. You can upon death select the year end as long as it does not go beyond 12 months from the date of death. Clearly that is something that will seriously be considered. Polling question number four. Will tax reform most likely make trusts more important, make trusts less important, no effect?
Moderator: Please remember that in order to receive your CPE certificate, you must remain logged on for at least 50 minutes and respond to at least three polling questions. I'll give you another 10 seconds to respond. Okay, we are now closing the poll and sharing the results.
Barbara Taibi: A, make trusts more important. I'll agree.
Jack Meola: Oh, I couldn't agree more. Asset protection for many of my clients has just become so paramount that with or without the tax savings that are available, they would still continue to utilize trusts. So, I see that as continuing. I want to move through some miscellaneous changes that comes into the planning that people are doing. The act provided that a charitable contribution deduction for an ESBT, which is an eligible trust for owning S corporate stock, is not determined by the rules generally applicable to trusts but rather the rules applicable to individuals. In the past where it was a consideration, the beneficiaries did not want to limit the limitation for charitable contribution. That provisions limiting charitable contributions is now eliminated, so therefore we can get a charitable deduction for an ESBT. That's a great technique.

Also, never ever forget the idea of utilization of IRC Section 663B, which is for complex trusts that make distributions within 65 days of the year end. You have until the filing of the tax return to select how much of a distribution you want to make. It's the best ability to use a window of opportunity to figure out what's the best income tax amount that you want to get to by making the election and stating the amount of the distribution. It's treated as a distribution in the prior year.

Under a prior law, non-resident alien was prohibited from being a shareholder of an S corporation and was not a potential current beneficiary of an ESBT. This too has been eliminated. For our international clients or clients that came from a foreign country who still have children in a foreign country and maybe children here in the United States, a fairness item was to be able to pass assets on to all of their children. Now a ESBT can be utilized if an S corporate is the family assets that's held that the parents want to be able to pass to their children both here in the US and those who are living and citizens of another country.

The effective date of all this was January 1, 2018. It's important that the considerations for all of those provisions take place now currently in this year except for the use of the GST on a late filed gift tax return, and still available to you because you can still file a gift tax return for 2017. It will be late. Hopefully you may have elected out of GST automatically allocation rules. If you have done that and considered it, it's a worthwhile proposition to do to fully have a trust without any inclusion ratio for the GST taxes.

This is the summary here of estates and trusts. This was similar to what Barbara had. Again, this is compact income tax provisions that apply. Planning with use of grantor trusts will continue because it gives you the payment of the income taxes as a means of getting assets out of a person's estate, number one. With these compressed tax rates, it's very prohibitive, and therefore planning and use of the 65-day rule is imperative. Thank you very much.
Moderator: All right. We hope you enjoyed today's webinar. Please look out for the followup email with a link to the survey and presentation. If you have additional questions about today's topics that you would like addressed, please feel free to email our teachers directly. For those who meet the criteria, you will receive a CPE certificate from the email address within 14 business days of confirmed course attendance. Thank you for joining our webinar today.

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