Introduction

The 2017 Tax Cuts and Jobs Act dramatically changed all aspects of income and estate tax planning and ancillary financial and insurance planning. Most articles have focused on explaining the new laws, which is natural as the first step must be knowing what has occurred. The 2017 tax act brings a myriad of nuances and subtle, as well as dramatic, changes. However, practitioners need to synthesize the complex analysis of the changes into practical solutions that apply to many of their clients. This article will endeavor to do just that.

Donor No Longer Getting a Tax Deduction for Charity

Planning Problem: The new doubled standard deduction prevents a moderate-income client from realizing any tax deduction from donations. However, there is a simple solution to secure that deduction that might be viable for many of these clients. Example: Clients in 2017 had $15,000 of state and local tax deductions, $5,000 of medical deductions and $7,000 of donations. Their itemized deductions of $27,000 exceeded the $12,700 standard deduction resulting in an additional $14,300 itemized deduction. Under the 2017 Tax Cuts and Jobs Act, the new standard deduction is $24,000 but SALT deductions are capped at $10,000. Total deductions are now $22,000 and there is no additional itemized deduction.

Planning Solution: A simple, home-state non-grantor trust is created to benefit all of the client’s descendants, the client’s favorite charities, and a donor-advised fund. A family member is named to be trustee who will not charge trustee fees. $150,000 of investment assets are given to the trust. The trust earns $7,000 a year in income. The Trust income will be exactly offset by the donations made to charity, meeting the requirements of IRS Sec. 642(c). That income will be removed from the client’s personal income tax return and will be offset by a contribution deduction. The clients will still qualify for the full $24,000 standard deduction. The tax deduction will be salvaged.  In a future year, any of the income can be directed to children or descendants if desired. If the 2017 Tax Cuts and Jobs Act changes do sunset (if Tax Reform 2.0 does not make them permanent), the client might opt to donate personally instead of through the trust. In that case, then all of the client’s descendants remain beneficiaries. While the plan may be an inefficient use of gift and GST exemption, with $22 million+ of exemptions, does it matter? Be careful that if the trust grants a person the right to add charitable beneficiaries to the trust that will characterize the trust as a grantor trust, it will defeat the plan. So, the charities to be benefited should be named from inception in the trust. However, it would appear that a donor-advised fund can be named as one of the charities thus providing flexibility to benefit other charities in the future.

Client Loses Any Benefit from Large Property Tax Deduction

Planning Problem: Husband and Wife incur $20,000 of property taxes, $20,000 of other state and local taxes, $5,000 of contributions, and $3,000 of medical expenses. Under prior law, all of the deductions above $12,000 would be deductible, or a deduction of $36,000 [($20,000 + $20,000 + $5,000 + $3,000) - $12,000]. Under the 2017 Tax Cuts and Jobs Act changes, SALT is limited to $10,000. The itemized deductions are -0- because [$10,000 SALT + $5,000 charity + $3,000 medical] = $18,000 which is less than the new $24,000 standard deduction.

Planning Solution: If, however, Husband and Wife gift 50% of the home to each of two non-grantor trusts, each trust, assuming they can structure around the multiple trust rules under the new Section 643(f) regulations (which appear to exceed the scope of the statute), may be able to deduct $10,000 of property taxes against other income (e.g., portfolio income on investment assets given to the trust).  The couple would still have the same standard deduction as they did before the transfer of $24,000. The net result is an increase in annual deductions of $20,000.

Client Has an Insurance Trust and Remains Frustrated with Annual Gifts and Crummey Powers

Planning Problem: Most clients dislike making annual gifts and absolutely hate dealing with annual demand or Crummey powers. What can be done and how does post-2017 TCJA planning affect the decision?

Planning Solution: Existing life insurance trusts can often serve as receptacles for larger gifts, or if the terms of the trust are not optimal (many aren’t), they often can be decanted (merged) into a more robust trust with more advantageous terms (e.g., lifetime trusts for descendants instead of distributions outright at specified ages). Post-2017 Tax Cuts and Jobs Act, many clients are creating non-grantor trusts for income tax planning. If an old insurance trust is going to be decanted into a new more robust trust to eliminate the need for future gifts and Crummey powers, carefully evaluate whether the new trust can be non-grantor if it will own insurance and assuredly use income to pay premiums. Also, clarify the planning goals with the client. If the client’s objective is to move portfolio assets that will be used as the additional funding out of her high tax state to avoid state income tax, perhaps the old insurance trust should be retained (or separately enhanced) and the new trust independently (i.e., without a merging of the old insurance trust) be structured as a non-grantor trust.

Client Wants to Use Temporary Exemption but Is Concerned They May Need the Money

Planning Problem: The three foundational planning goals for most clients (perhaps other than ultra-high net worth clients, e.g., over $40 million) are: 1) use the temporary exemption before sunset or law change; 2) assure access to funds given; and 3) achieve non-grantor trust status to optimize income tax benefits (e.g., 199A deductions, charitable deductions property tax deductions, NIIT savings, etc.). This planning target post-2017 TCJA is not simple to meet, but it is possible. For example, the most common way to have provided completed gifts and access practitioners have used, and with great frequency since the 2012 planning deluge (when it was thought that the $5 million exemption would drop to $1 million in 2013) have been nonreciprocal spousal lifetime access trusts (“SLATs”). The problem with SLATs is that they meet two of three objectives: 1) completed gifts; and 2) use of exemption and access as each spouse is a beneficiary of the other spouse’s trust. But if a spouse is a beneficiary, the trust will be characterized as a grantor trust and the desired post-2017 tax act income tax benefits won’t be achieved.

Planning Solution: However, if the spouse’s right to receive a distribution is conditioned on the approval of an adverse party (e.g., a child who is a remainder beneficiary), that may suffice (although the law on what constitutes an adverse party is a bit fuzzy and caution is in order). Adding that mechanism to a SLAT, and also assuring that none of the other powers that might trigger grantor trust status are avoided (e.g., no one can hold a power to add additional beneficiaries such as charities or to loan funds to the settlor without adequate security, etc.) the trust can be a non-grantor trust and achieve all three goals.

Conclusion

Planning after the 2017 Tax Cuts and Jobs Act pushes practitioners into new and different planning dynamics, involves trusts that are different than any commonly used in the past. However, the integration of income and estate tax planning goals (much more robust than merely basis step-up concerns which must be considered), asset protection planning, and more, provides incredibly planning opportunities.

Martin M. Shenkman, CPA, MBA, AEP (distinguished), PFS, JD, is an attorney in private practice in Fort Lee, New Jersey and New York City. He is an editorial board member of Trusts & Estates Magazine. He is also the recipient of many industry and charitable awards including: Worth Magazine’s Top 100 Attorneys, CPA Magazine Top 50 IRS Tax Practitioners, the AICPA Sidney Kess Award for Excellence in Continuing Education for CPAs and Financial Planning Magazine 2012 Pro-Bono Financial Planner of the Year for efforts on behalf of those living with chronic illness and disability. He is also active in many charitable and community organizations and boards including a Board Member of the American Brain Foundation. He is the founder of Chronic Illness Planning.org and lectures around the country for more than two months a year on planning for those living with chronic illness or disabilities. For additional information, please visit www.shenkmanlaw.com.