On December 20, Congress passed the Tax Cut and Jobs Act, the most sweeping tax reform since 1986. I am writing to mention a few highlights of the Act.

The estate, gift and generation-skipping transfer tax exemption will increase from $5,490,000 in 2017 to $11.2 million per person in 2018. The exemption will be adjusted each year until 2026 based upon inflation.  In 2026, the exemption will be divided in half (i.e., it will be approximately $6 million, depending upon inflation between now and 2026).  In order to benefit from this temporary increase in the exemption, you must either die during the eight-year period (2018 through 2025) or make large taxable gifts during that time period.  Who dreams up these crazy laws!

The income tax rates for individuals, estates and trusts have been lowered, including the top bracket of 39.6% being reduced to 37%. The top income tax rate for C corporations will be reduced from 35% to 21%.

Individuals, trusts, and estates will receive a 20% income tax deduction for qualified business income from pass-thru entities such as LLCs, S Corporations, Partnerships, and REITs. There are significant limitations that apply to income from certain pass-thru entities that are personal service businesses.

The deduction for qualified business income and the changes in the income tax rates for individuals, C corporations, and trusts and estates will apply for an eight-year period starting in 2018.

The changes made by the Act have enormous planning implications, especially for owners of closely-held businesses. Between now and year end, you should consider accelerating certain deductions and deferring income when possible.  If you want to accelerate future charitable gifts to 2017, you can temporarily fund a donor advised fund or private foundation.

Today, the GOP Tax Bill, H.R. 1 was introduced in the House of Representatives.  The Bill is 429 pages long and covers many tax areas that we will cover in future blogs.

As promised, the Bill repeals estate and generation-skipping transfer taxes.  You must live at least six more years in order for your heirs to benefit from this full repeal, because the full repeal will only be effective for decedents dying after December 31, 2023.  For individuals dying after 2017 yet before 2024, the estate tax exemption will increase to $11.2 million in 2018 with cost of living adjustments thereafter.  Under current law, it is scheduled to be $5.6 million in 2018.

Many had feared that the Bill would eliminate stepped-up basis for assets received upon death.  The summary of the Bill prepared by the House Ways and Means Committee confirms that heirs will continue to receive stepped-up basis in inherited assets.

Gift taxes will be retained; however, the gift tax exemption will increase to $11.2 million for gifts made after December 31, 2017.  There will be an annual cost of living adjustment for the gift tax exemption.  After 2023, the maximum gift tax rate will decrease from 40% to 35%.

The estimated revenue decrease from the changes to the estate, gift, and GST taxes is $172.2 billion between 2018 and 2027.

The enunciated primary considerations for these changes are:  (i) to eliminate double or triple taxation of family businesses; and (ii) to incentivize small business owners to invest in their businesses and hire more employees.

Many political commentators are pessimistic about the chances of the Bill being passed in its current form.  Stay tuned.

Tennessee eliminated its “death tax” in 2016.  This is great news for Tennessee residents.  However, if you own property such as a vacation home in another state, you may owe “death taxes” in that estate when you die.  The following 18 states still impose a death tax:

District of Columbia
New Jersey
New York
Rhode Island

If you own property in one of these states, proper planning may reduce or eliminate the potential death tax.  You can also avoid the need to probate your Will in that state by transferring your property to a revocable trust or a business entity such as an LLC.

Seventeen states now recognize asset protection trusts.  Steve Oshins, who prepares an annual ranking of these statutes, ranks Tennessee’s statute as the third best in the country.  Dave Shaftel has done a very thorough comparison of the various statutes, including a Comparison Map of the various states that allow asset protection trusts.

As time has gone by, we have found several ways in which these trusts can help our clients and are now establishing several of these trusts every month. I don’t know whether all 50 states will eventually authorize these trusts, but I predict that many more will soon adopt them.

A number of our clients have already changed their residency to a state with no income taxes – most often Florida, or have been considering making such a change.  They have moved to avoid paying the Tennessee Hall Income Tax which applies to dividends and certain interest.

If you have already moved, you can start making plans to move back in the year 2021.  The Tennessee legislature has just passed the Improve Act, which will permanently eliminate the Hall Income Tax in the year 2021.  The rate will also ratchet down by 1% per year every year between now and 2021.  The rate will be 4% in 2017, 3% in 2018, 2% in 2019, and 1% in 2020.

Unlike prior legislation which made these gradual decreases discretionary, these rate changes will not require any further action from the legislature.

Today, one of my clients called me because his Trustee is moving to Colorado.  Five years ago, he established a Tennessee Investment Services Trust, a/k/a asset protection trust.  The creditor protection provided by these trusts is dependent upon the Trustee being a Tennessee resident or trust company.

Tennessee Community Property Trusts have the same requirement.  You need a Tennessee trustee if you want to obtain the benefits provided by these trusts.

When your Trustee of one of these two types of trusts moves away from Tennessee, you must change the Trustee to a Tennessee resident or trust company.  You should first review the trust agreement to see if a successor trustee has already been designated.  Assuming that a successor has been designated, the currently serving Trustee can resign and the successor can take over.  It is customary for the successor to ask the beneficiaries to release the successor from the duty of investigating the actions of the prior Trustee.

If no successor is designated in the trust agreement, then you will need to follow the procedures set forth in the trust agreement to appoint a successor.  With asset protection trusts, you must appoint a Disinterested Trustee, i.e. a corporate Trustee or a Tennessee resident who is not a beneficiary or related to you.  In the case of a Tennessee Community Property Trust, the Trustee does not have to be Disinterested.

Most other types of trusts do not require a Tennessee trustee.  However, be wary of a potential tax problem.  Some states, such as California, impose state income taxes just because the Trustee resides in that state.  You can avoid these taxes by appointing a different Trustee.

I recommend that you call your trust attorney when your Trustee moves away from Tennessee.

This is the third article in a series discussing various tax planning opportunities that should be considered in the wake of the recent elections.  For the prior articles see:

Postponing Sales Until 2017; and

Should you Accelerate Charitable Gifts to 2016?

President-Elect Trump has made it clear that he intends to repeal federal estate taxes.  In light of the Republican majorities in the House and Senate, prognosticators believe that estate tax repeal will occur in the near future.  Assuming that estate taxes are repealed, there are numerous questions.

First, when will the repeal occur?  The last time that estate taxes were repealed in 2001, the repeal did not actually occur until 2010.  If there is a repeal with a delayed effective date, you will still owe taxes if you are unfortunate enough to die before the repeal becomes effective.

The second issue is whether repeal will be permanent.  Federal estate or inheritance taxes have been repealed four times in the past (1802, 1870, 1895, and 2010).  Each time the tax was repealed, it was later reenacted in a different form.  The most recent reenactment actually occurred in 2001, by the same Congress that repealed the tax for 2010.  They actually voted for the tax to reappear in 2011!  Based on history, I do not expect that repeal will be permanent.  It is easy to imagine a day when the 99.9% who will not have to pay the tax again decide that it is fair for our wealthiest taxpayers to pay a tax upon death.  Of course, this is grossly unfair to the 0.1%, but it was unfair every other time that estate taxes were enacted.

The third issue is whether the revenue loss from estate tax repeal will be replaced, in whole or in part, by a loss of stepped-up basis, or, even worse, capital gains tax upon death.  Under current law, the income tax basis of assets gets changed to the fair market value of the assets owned upon death.  The asset can be sold by one’s heirs soon after death without paying capital gains tax.  If stepped-up basis is removed, the tax will need to be paid when assets are sold after death.  When the tax was repealed in 2010, stepped-up basis was removed, though there was a limited amount of basis step-up granted.  Unlike estate taxes, which currently only are paid by 0.1% of decedents, stepped-up basis benefits the families of all decedents who own appreciated assets.

A more troubling possibility is a capital gains at death tax system, which is used in Canada.  This system would impose a capital gains tax on the built-in gains on assets owned at death.  If you lose stepped-up basis, at least you can postpone the date upon which the tax will be incurred.  If taxes are imposed at the time of death, the ability to postpone the tax will be lost.

Several clients have asked us whether they should alter their estate planning in light of the proposed repeal of estate taxes.  In my opinion, it is premature to alter your estate planning based upon the assumption that you will die in a year in which estate taxes do not exist.  As a general rule, if there are sensible strategies to remove assets from your taxable estate, I recommend that you implement these strategies.  As always, you should favor strategies that are flexible so that you can take advantage of future opportunities.

This is the second article in a series discussing various tax planning opportunities that should be considered in the wake of the recent elections.  The prior article discussed postponing sales until 2017.

There are at least three aspects of President Elect Trump’s tax plan that favor accelerating charitable gifts to 2016.

First, income rates will likely go down in 2017.  If you can make a gift in 2016 and reduce your taxes by 40% of the amount you give, this is likely a bigger savings than you will receive in future years.

Second, Trump proposes to cap itemized deductions at $200,000 per year.  This limitation will significantly reduce the benefit of making charitable gifts for certain taxpayers.

Third, Trump proposes to impose a capital gains tax on transfers of appreciated property to a private foundation.  It is unclear whether he intends for this rule to apply to lifetime gifts or just to testamentary gifts.  However, if this tax only applies to testamentary gifts, it could be easily avoided by making a deathbed gift.

Today, I met with a couple who are considering making a substantial charitable gift sometime between now and the first quarter of 2018.  These clients expect to receive substantial income in 2017.  I called my client’s CPA and she ran the numbers based on a hypothetical 2017 tax system consistent with Trump’s proposed plan.  The conclusion is that the clients will get significantly more tax savings by making a gift in 2016.  The gift will consist of some cash and appreciated securities given to a private foundation and some cash given to a donor advised fund.  The private foundation and the donor advised fund will allow my clients to make the gift now and pick the actual charities that will receive the funds later.  Giving part of the gift to a donor advised fund will allow the clients to save more taxes as compared to giving everything to the private foundation.

I have learned from experience that significant changes in Washington create tax planning opportunities.  Tax laws always change significantly when the party affiliation of the President flips.  It might seem prudent to wait for the laws to change before making major decisions.  However, waiting for certainty may result in foregone opportunities.

In the last few days, I have received numerous calls from clients about various tax issues that are impacted by the results of the election.  I plan to write a series of articles detailing the types of issues that my clients are confronting.

The first decision involves the timing of the sale of a significant asset.  One client was planning to sell real estate in December.  Another client was planning to sell his business in December.  These clients both contacted the buyer about postponing the sales until January of 2017.  They are hoping that income tax rates will be lower for sales in 2017.  If rates are reduced in 2017, will be the rate decrease be made retroactive to January 1, 2017?  There is precedent for making this type of a change.  However, there is also precedent for making a change effective during the middle of a year.  Postponing sales until January seems like a sensible strategy, though waiting longer might provide a better result.

In 2008, Kelley Cannon murdered her husband.  She was later convicted of first degree murder and is currently serving a lengthy prison sentence.  While serving her sentence, she has attempted to benefit financially from her husband’s death by claiming a share of his estate and an insurance trust that he had established.  Paul Gontarek and Kelly Caissie, two attorneys in our firm, recently convinced the Tennessee Court of Appeals to rule against Mrs. Cannon based upon the Slayer Statute.

The Slayer Statute prevents a killer from inheriting from the victim.  For this statute to apply, proof of the killing must be established by a preponderance of the evidence (i.e., more likely than not).  Independent proof of the killing should be unnecessary since Mrs. Cannon’s criminal conviction required proof beyond a reasonable doubt, which is a much more difficult standard.  Nevertheless, it took 8 years and two trips through the Davidson County Probate Court and the Tennessee Court of Appeals to invoke the Slayer Statute without a second murder trial.  Paul and Kelly convinced the Court of Appeals to apply a legal doctrine known as Collateral Estoppel, which permits the Court to recognize the criminal conviction as proof of the killing.

The Court reached a sensible result and allowed the decedent’s three children to inherit the entire estate and insurance trust.