Effective in 2018, the Tax Cuts and Jobs Act, signed into law on December 22, 2017 by President Trump, includes many new provisions that not only impact the taxation of trusts and estates but may also potentially affect your estate plan.
The new tax table for estates and trusts have not changed significantly, moving from five tax rates to just four. The brackets are still extremely compressed as compared to the individual tax brackets. Taxable income above $12,500 is taxed at the highest rate of 37% (previously 39.6%). See below for a comparison of pre vs. post tax reform tax tables.
2017 Tax Table
If taxable income is: Then income tax equals:
Not over $2,550 15% of the taxable income
Over $2,550 but not over $6,000 $382.50 plus 25% of the excess over $2,550
Over $6,000 but not over $9,150 $1,245 plus 28% of the excess over $6,000
Over $9,150 but not over $12,500 $2,127 plus 33% of the excess over $9,150
Over $12,500 $3,232.50 plus 39.6% of the excess over $12,500
2018 Tax Table
If taxable income is: Then income tax equals:
Not over $2,550 10% of the taxable income
Over $2,550 but not over $9,150 $255 plus 24% of the excess over $2,550
Over $9,150 but not over $12,500 $1,839 plus 35% of the excess over $9,150
Over $12,500 $3,011.50 plus 37% of the excess over $12,500
State and local taxes. The new law limits the aggregate deduction for state and local taxes, including income taxes and property taxes, to $10,000 per year. Property taxes related to the production of income and investment holdings do not fall under this limitation and can be deducted in full.
Miscellaneous Itemized Deductions. The new law suspends all miscellaneous itemized deductions subject to the 2% limitation, included investments fees and unreimbursed business expenses. The deductibility of trust accounting and legal fees, trustee/executor fees and other costs incurred in connection with the administration of an estate or trust appears to be unaffected by the new legislation, but is pending clarification. The new legislation does not provide a clear exception for the expenses of estates and trusts that are not subject to the 2% limitation.
Impact on Estate Plan.
Changes to individual, estate, corporate, and pass-through entity taxation provisions will also impact many estate plans. Some of the provisions included in the law that may affect your plans include:
- Increase in estate and gift tax exclusions amounts — for 2018, the estate and gift tax exclusion amount — the amount a taxpayer may transfer without incurring estate or gift taxes — is inflation-adjusted to $11,180,000. The increased estate and gift tax exclusion amount is only available for decedents dying and gifts made after 2017 and before 2026; thereafter, the inflation-adjusted estate and gift tax exclusion amount returns to $5,000,000. The value of a person’s estate and/or lifetime gifts exceeding the exclusion amount is subject to a 40% estate and gift tax rate. Aside from being free from gift taxes, lifetime gifts of up to $11,180,000 could save estate taxes because they remove post-gift appreciation on, and possibly income from, the gifted assets from the transferor’s estate.
- Increase in charitable contribution limit for cash donations — the legislation increases the amount of cash contributions to charitable organizations that may be deducted from 50% of a taxpayer’s contribution base (generally equal to adjusted gross income) to 60% of the contribution base for tax years after 2017 and before 2026.
- New deduction for certain business income earned through pass-through entities — the legislation creates a new deduction for individuals and trusts/estates, generally equal to 20% of the qualified business income received by the individual or trust from a pass-through business. Certain service businesses (such as law, accounting, investment management, etc.) are excluded, and there are other income limits and conditions placed on the receipt of the deduction that we should discuss if you earn income from such entities.
- Changes to Electing Small Business Trusts — generally, shareholders in an S corporation must be U.S. individuals; however trusts, including electing small business trusts (ESBTs), that meet certain criteria can hold such stock. Under prior law, for an ESBT to be a qualified shareholder, all of the beneficiaries of the trust had to be U.S. individuals. The legislation has removed the requirement that beneficiaries be U.S. persons, meaning nonresident aliens can now be ESBT beneficiaries without resulting in the termination of the S corporation’s status. In addition, ESBTs will now be subject to the charitable contribution limitations applicable to individuals, rather than the unlimited deduction allowable to trusts.
In light of the numerous changes made by the new legislation, we recommend a review of your estate plan to make sure that it continues to satisfy your tax- and family-related objectives while remaining as flexible as possible. Please contact your L&B professional at (858) 558-9200 to schedule a convenient time to discuss your estate plan and how the recent tax law changes might impact you and your family.