Given the status of the Senate and announced legislative goals, my emphatic advice is to revisit your estate planning prior to any new law.
New Regulations Issued: The Internal Revenue Service (“IRS”) has issued Final Regulations under the Bipartisan Budget Act relating to changes in the audit of entities taxed as partnerships (those which file IRS Form 1065 – which includes most Limited Liability Companies and Limited Partnerships) and how adjustments are allocated for such entities. A centralized partnership audit regime was established with a Partnership Representative required for each such entity. These changes are significant.
Act Now: It is important to amend any Operating Agreement or Limited Partnership Agreement you have to comply with these developments. Almost all such agreements need to be rewritten.
What You Should Do: Contact us. We are reviewing client files to determine which agreements should be amended and it is likely your documents need to be amended.
President Trump signed the Tax Cuts and Jobs Act December 22, 2017. The Act is the most sweeping tax legislation since the 1980s. It is broad in scope, complicated and will impact almost every aspect of tax, legal, estate, retirement, business and other planning. While there has been substantial media coverage of parts of the new law, the coverage has not delved into the provisions that might be relevant to you.
Changes made by the Act include:
- Marginal income tax rates are lower. The Alternative Minimum Tax is not repealed but the thresholds for when it applies, phase outs and which items may trigger it have changed. These changes might affect the way you invest, estimated tax payments, and more.
- The standard deduction is doubled, which changes planning for charitable contributions, medical expenses and other items. For example, it might be advantageous to take deductions over several years to maximize the amounts deductible.
- State and local taxes (property and income) are only deductible up to $10,000. This change affects home ownership, investing and tax planning. For some it might determine where to live.
- Alimony in divorces after 2018 or prior divorces that opt into the new rules will no longer be deductible. Changes in tax rates, property values, exemptions and more suggest that if you are divorced or in the process of divorcing you should review the implications of the new law.
- 529 accounts can now be used for elementary and secondary school. You may want to give more to such accounts.
- The estate tax exemption is doubled to $11.2 million per person ($22.4 million per couple) and indexed to inflation. However, these higher amounts are temporary and will disappear in 2025 or earlier if the political climate in Washington changes.
From an estate planning perspective, changes to existing planning must be reviewed:
- Smaller estates can and should take advantage of opportunities to maximize income tax basis and avoid future capital gains.
- Moderate wealth estates should evaluate whether to use some of the new exemptions before 2025 or they are changed by a future administration in Washington.
- Ultra-high net worth estates should aggressively pursue planning to minimize future estate taxes because the estate tax is not being repealed and a future administration could make the planning environment much less friendly.
- All wealth levels should review existing estate planning documents because the new law may make how assets are allocated, tax planning clauses and other provisions obsolete. The new law may in some instances be destructive to planning goals.