January 2018 Newsletter
ESTATE PLANNING AND TCJA 2017
We have received many telephone calls with questions of “how will the new tax bill affect my estate planning?” Although The Cuts and Jobs Act (“TCJA”) of 2017 affects your federal income taxes and estate taxes, this newsletter will discuss its effects on estate plans.
There are four primary areas of change that will affect estate planning: 1) the doubling of the Federal Estate Tax Exemption and the Generation Skipping Transfer (“GST”) Tax Exemption; 2) 529 Plans are now applicable to K-12 schooling in addition to college; 3) changes to the “kiddie tax” being taxed at the trust and estate tax brackets; and, 4) its effects to charitable giving.
Doubling of the Federal Estate Tax Exemptions:
The Federal Estate Tax Exemption and GST Exemptions are doubled through December 31, 2025 and thereafter reverts back down to 2017 levels on January 1, 2026. This means in calendar year 2018, instead of having an exemption amount of $5.6 million per individual or $11.2 million per married couple, each individual will have $11.2 million and each married couple will have $22.4 million of Federal Estate and Gift Tax exemptions. This means a substantial amount of wealth can be transferred outside of federal taxable estates during these years and clients, during the years from 2018 through 2025, should consider taking advantage of the higher exemption similar to what occurred in 2010-2012.
A 529 Plan is a special arrangement where donors could use the annual gift tax exclusion amount to fund future college tuition. The typical situation is a grandparent makes contributions annually or an accelerated five year payment for the benefit of grandchildren. This removes assets from the grandparents’ estate, allows the funds to grow income tax free and allows the younger grandchild to make tax-free withdrawals to pay for his/her college expenses. The other benefit is that the donor has the ability to apply the 529 Plan funds to another individual/grandchild in the donor’s discretion especially if the designated grandchild decides not to attend college or there is a change in the relationship.
The TCJA extends this special tax treatment whereby now the individual beneficiary can withdraw tax free up to $10,000 per year to pay for private, elementary or home school K to 12 education in addition to college costs.
Additionally, 529 Plans are now permitted to be rolled over to what is called a 529A Plan informally called an “ABLE account” which provide tax-free distributions for disabled beneficiaries as long as the 529A beneficiary is the same beneficiary or a member of the same family of the original 529 plan account.
One estate and income tax planning technique was to transfer investments and other income producing assets to a child having a lower marginal income tax rate. The “kiddie tax” was instituted to combat this loophole by taxing all unearned income in excess of $2,100 of children under the age of 19 or college students under the age of 24 at the parents’ marginal tax rate. This meant if a child was in the 15% marginal income tax rate bracket and the parent was in the 37% marginal income tax rate bracket, the child’s unearned income would be taxed at 37% instead of the loophole rate of 15%.
Under TCJA the kiddie tax is now under estate/trust tax brackets which has a highest marginal rate of 37% commence at an income level of only $12,500. A married couple, filing jointly, requires $600,000 of taxable income to be taxed at the 37% tax rate. Under the new rule, it is important to have a proper analysis prepared before transferring investments and other income producing assets to a child in that a child’s unearned income may be taxed at a higher rate than their parents’ rates.
Charitable planning is affected in two ways: a) the Adjusted Gross Income (“AGI”) limitation for charitable cash contributions is increased to 60% as opposed to 50%; however,b) due to the lower income tax brackets the tax benefit of charitable contributions is reduced.
For the AGI limitation, previously this meant that if an individual’s AGI was $100,000, a person could receive a deduction of $50,000 for charitable cash contributions. Now this taxpayer would receive a charitable deduction of $60,000. This change will benefit charitable giving for higher income individuals as he or she will receive a greater tax benefit on comparable charitable gift amounts.
However, this will impact certain donors who may reap less of a tax benefit due to the lower income tax rates. For instance, a married couple earning $233,350 a year will receive a marginal deduction of 24% under TCJA vs. 28% under the 2017 tax brackets. While it does not seem like much, it is a 14% reduction. While it may not have a huge effect, it remains to be seen whether it will curtail end of year charitable gifts.
Overall, TCJA provides certain estate planning benefits. It provides for greater federal estate exemption amounts, greater latitude on 529 Plans, and a higher charitable deduction limit. On the other hand, it is not all peaches and cream as it can create a penalty for those clients who have moved or intend to move income producing assets to children who now will be taxed at the estate/trust income tax brackets. If you have any questions on the new tax law and how it affects your planning, do not hesitate to contact our offices.