By Vanessa L. Kanaga
As any estate planner knows, the 2017 law commonly referred to as the "Tax Cuts and Jobs Act" or "TCJA" (Pub. Law 115-97) changed the landscape of estate planning, perhaps not permanently (because what tax law is ever permanent?), but for the near future. The Basic Exclusion Amount (the amount that can pass free of gift or estate tax) doubled to over $11 million under the TCJA, making estate tax planning far less important for most clients and their estate planners. In truth, this merely accelerated a decline in the importance of transfer tax planning that had been the trend for several years, or at least since the American Taxpayer Relief Act of 2012 "permanently" increased the Basic Exclusion Amount to $5,000,000, adjusted for inflation. The good news, at least for estate planners, is that the TCJA also enacted new provisions relating to the federal income tax that affect a number of estate planning clients, and provide new opportunities for the attorneys advising them.
Income Tax Planning Opportunities Using Non-Grantor Trusts
The $10,000 limit on the deduction for state and local taxes unrelated to a trade or business (sometimes referred to as the "SALT" deduction), in new Section 164(b)(6) of the Internal Revenue Code (the "Code"), has the potential to increase the federal income tax bill of many clients, particularly those in states with high income or property tax rates. In response to this new limitation, estate planners have devised new planning techniques involving Incomplete Non-Grantor Trusts and Non-Grantor Spousal Access Trusts (referred to in the InterActive Legal programs as the "ING" Trust and the "SALTy SLAT," respectively). These techniques are intended to effectuate the transfer of assets to trusts in order to avoid state income tax, or divide ownership among multiple taxpayers, each of which is entitled to its own SALT deduction. I mention these techniques as an example of the shift in focus to income tax planning under the TCJA regime, and will not go into detail here. If you are interested in learning more, I recommend watching the webinar recently presented by Martin Shenkman, Bill Lipkind, and InterActive Legal Editor-in-Chief Jonathan Blattmachr, INGs: Extraordinary Planning Tool to Reduce Income Tax Even for Those in Income Tax Free States, available on the Shenkman Law website.
Other changes brought about by the TCJA have received a good deal of attention, including the deduction against income from pass-through entities under new Section 199A of the Code. One new provision under the TCJA that, until recently, has received little attention, is new Section 1400Z-2 of the Code, providing for the deferral of certain capital gain invested in a "qualified opportunity fund." Perhaps this section has not received much attention because it created many questions regarding its application and administration, and Treasury Regulations prescribed by Section 1400Z-2(e)(4) were expected to fill these gaps. The IRS published proposed Regulations on Investing in qualified opportunity funds on October 19, providing needed clarification and detail on the qualification of opportunity zone (or "O-Zone") funds, and the gain deferral under Section 1400Z-2.
The new O-Zone investment rules will have limited application for most estate planning clients. Among other limitations, the rules only apply to capital gain recognized in a sale or exchange with an "unrelated person," and require investment of such gain in a "qualified opportunity fund" in order to take advantage of the deferral of gain recognition provided by the rules. However, for the right client who would otherwise recognize capital gain from the sale of an asset in the near future, the new O-Zone investment rules provide an opportunity to defer recognition of that gain, with the additional benefit of a partial basis step-up if the investment is held for a certain period of time. In addition, the proposed Regulations confirm that taxpayers eligible to take advantage of this gain deferral include partnerships, S Corporations, trusts, and estates, as well as individuals, expanding their potential relevance to the estate planning practice. See Code § 1400Z-2 and the proposed Regulations, available here, for more details.
For Those High-Net-Worth Clients: Gifting Opportunities
Although the large Basic Exclusion Amount, which the IRS recently announced will increase to $11.4 million in 2019 (See Rev. Proc. 2018-57), has significantly decreased the number of clients concerned about federal estate tax, planning opportunities still exist for those clients with assets in excess of $5 million, and for those who reside in jurisdictions with a State estate tax. The Basic Exclusion amount is scheduled to revert back to $5 million (adjusted for inflation) in 2026, so estate planners should encourage clients with assets in excess of $5 million (and married couples with assets in excess of $10 million) to consider making lifetime gifts to take advantage of the excess exclusion amount while it is available.
The IRS recently issued proposed Regulations that, if promulgated, would eliminate concerns that gifts in excess of $5 million will be "clawed back" into the estate for purposes of calculating the estate tax, if the donor dies in 2026, after the Basic Exclusion Amount decreases. See 83 Fed. Reg. 59,343, available here. This further incentivizes lifetime gifting in order to take advantage of the current Basic Exclusion Amount. The incentive is even greater for those clients in jurisdictions that impose a State estate tax, as lifetime gifts may have the effect of reducing the client's taxable estate at the time of death, often avoiding State transfer tax entirely.
A Glass More Than Half Full
For many estate planning attorneys, the TCJA initially raised concerns about the future sustainability of a practice that, until recently, was largely consumed with planning to avoid federal estate tax. However, after a year of living with the changes brought about by the TCJA, many of us in the estate planning field are beginning to see that the new legislation brought about the chance to focus on other aspects of the practice, including those outlined above. In retrospect, it seems the glass is not only half full – it is brimming over with new opportunities!
Meet Vanessa L. Kanaga, Esq.
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Vanessa received her J.D. from Cornell Law School, Magna Cum Laude, in 2006, and holds a B.A. in Philosophy from Wichita State University, with a minor in Music, as well as an Advanced Professional Certificate from New York University School of Law. Following law school, Vanessa practiced in New York for several years, at Milbank, Tweed, Hadley & McCloy, LLP, and then Moses & Singer, LLP. In 2012, she returned to her home town of Wichita, Kansas, where she was an associate attorney in the estate planning and probate practice group at Hinkle Law Firm, LLC, before joining InterActive Legal.