Trump Era Trust Planning: Opportunities for the Observant, Risks for the Inattentive

Feb 20, 2018

The Trump era brings about changes to the world of tax law and many planning opportunities. But with it, many unintended consequences may require people to review their current plans. In doing so, people might find that there are opportunities which could significantly lower their tax bills. On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) became law. This new bill is as exciting as it is complicated.

Altered Dispositions from Trusts

While potentially being hailed as a great gift from Congress, there are consequences. To start, there is a double-edged sword with respect to the estate and gift tax exemption which has been essentially doubled allowing an individual to now pass just over $11 million free of estate and gift tax. This is great, right? Well, there are some issues. First, some states do not follow the federal exemptions and some wills and trusts may not work as intended. For instance, if someone has an traditional tax plan with credit shelter and marital trusts (an amount equal to the exemption amount funding the credit shelter first, with the rest funding the marital trust), there can be some serious missed opportunities as well as some unintended consequences. First, for individuals with a net worth below the exemption amount, all assets would pass to the credit shelter trust. While there would be a step-up at the first spouse’s, there would be no step-up in cost basis at the second death. This can result in higher income tax for the family, without any offsetting estate tax reduction. Further, pending any dispositive terms of the trust itself or the underlying credit shelter trust, the surviving spouse may lost intended access to the wealth in the credit shelter trust. Ideally, a disclaimer or similar plan would have allowed a wait-and-see approach and offered some chance to alleviate this situation. The last and potentially worst part is if the decedent died in a state that did not follow the federal estate tax current exemption, there could be a hefty state estate tax bill for the family. Additionally, many clients do not like the complexity of a multi-trust estate plan. A number of individuals now no longer need such plans to minimize estate tax. There may be an easy fix to all of this.

Problems aside, there are plenty of opportunities in the TCJA for planning. Three areas were specifically discussed in a recent Forbes article, citing nationally recognized planners Steve Oshins and Jonathan Blattmachr. ¹

Basis Step-Up Planning

First, one of the main opportunities is being able to take advantage of the new exemption for step-up planning purposes. This could be a great opportunity for people with appreciated property to be able to erase the unrealized appreciation in assets they may desire to sell in the near future. Sometimes known as the “mother-in-law trust,” a vehicle exists for being able to step-up tax basis of assets by utilizing an otherwise wasted estate tax exemption of another person. With the large increase in estate tax exemptions, many individuals may be able to leverage the estate tax exemptions of family (especially parents) to obtain a step-up in cost basis in assets thereby saving a substantial amount of income tax at no wealth transfer tax cost at all.²

Qualified Business Income Optimization

Second, a plan exists to take advantage of the Qualified Business Income deduction provisions in the TCJA, especially with respect to specified service income codified at IRC §199A. This is especially important for a “specified trade or business,” being defined to include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset is the reputation or skill of an employee, because income from such businesses are subject to significant limitations on the deduction.

Oshins has suggested utilizing a marketing company owned by a family business-owner and non-grantor trusts for children and grandkids with each owning a fraction of the marketing company. In his example, after the business owner takes a reasonable salary, each trust would land with a targeted $150,000 in annual pass-through gain. With a 20% deduction available to each trust, a total of $240,000 in income can avoid income tax with a net savings of approximately $89,000 per year. The same planning could be engaged in using a management company, leasing company, or other vehicle charging the historic business for services traditionally performed in house. Even without the use of trusts, it is possible that charging separately for such services essentially converts income from a “specified trade or business” to income not subject to those limitations on deductibility.

SALT Deduction Preservation

Lastly, Jonathan Blattmacher has proposed getting around the state and local tax deduction cap by placing high-tax, personal-use property in an LLC and then putting the LLC interests into non-grantor trusts. By also funding the trusts with income producing assets to absorb a $10,000 annual property tax deduction, an individual can increase the amount of available deduction. For example, placing property into four, separate non-grantor trusts allows up to $40,000 of property tax deductions every year rather than the otherwise applicable $10,000 limitation.

ESA is regularly monitoring changes in the tax law, conferring with cohorts in its networks, and always looking for opportunities for its clients. If you have any questions about this article or wish to talk with one of our attorneys regarding your own planning opportunities, please contact us.