Preservation | Family Wealth Protection & Planning

With the passage of the Tax Cuts and Jobs Act (TCJA) in December 2017, the nearly doubling of the lifetime estate and gift tax exemption (currently $11.4 million in 2019) shifted the focus for many from estate tax planning to income tax planning. A wide range of income tax planning techniques can now be used under the TCJA, and it is important to explore these income tax planning techniques as a part of the estate planning process.

On June 21, 2019, the U.S. Supreme Court unanimously decided in favor of a taxpayer trust, finding that the state of North Carolina could not tax the trust merely because a trust beneficiary, who received no trust income or right to demand income, resided in North Carolina.

With an estate tax exemption of $11.18 million in 2018 (rising to $11.4 million in 2019), estate planning has been turned on its head. For most people, estate taxes are no longer an issue, and the increased exemption provides options for reducing capital gains taxes. For those families with estates over $22.8 million, the new gift/estate tax exemption provides additional opportunities for estate tax planning.

Thomson Reuters recently published its estimated figures for 2019 for estate and trust income tax brackets, as well as the exemption amounts for estate, gift and generation-skipping transfer (GST) taxes. These figures are adjusted annually for cost-of-living increases.

Pursuant to the Tax Cuts and Jobs Act, the measure of inflation has changed for these figures. Thomson Reuters warns that because of errors and ambiguities in the act, the estimates were made based upon what Thomson Reuters staff believed to be consistent with congressional intent.

Traditionally, due to lower estate tax exemption amounts, many married couples would use bypass trusts or credit shelter trusts as part of a typical estate plan. For example, on the death of the first spouse, assets in that spouse’s revocable trust would be allocated to a bypass trust (frequently referred to in the trust document as a family trust) up to the amount of the deceased spouse’s remaining estate tax exemption, with the balance allocated to a marital trust for the surviving spouse. The bypass trust would not only pass estate tax free at the first spouse’s death, but would also be outside of (i.e., bypass) the surviving spouse’s taxable estate at death. In addition, the bypass trust assets might continue from generation to generation without being subject to any additional “transfer taxes” like the generation-skipping transfer (GST) tax, if GST exemption was allocated to the trust. This type of planning continues to provide a variety of benefits.

Similar to individuals, trusts normally pay federal and state income taxes. In 2018, the highest federal rate of 37 percent only applies to single individuals if they have more than $500,000 of income and to married couples filing jointly if they have more than $600,000 of income. However, a trust will be in the highest federal tax bracket if it has more than $12,500 of income. (The maximum long-term capital gains and qualified dividends rate is now 20 percent for trusts with more than $12,700 of income.)

As a result of legislation enacted in 2015, the filing deadlines for certain tax returns due in 2017 have changed. Congress included tax return due date legislation as a revenue provision in the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. The legislation, signed into law in July 2015, made changes to certain tax return due dates generally effective for tax years beginning after Dec. 31, 2015, making the changes applicable to 2016 tax returns filed in 2017.

The following is a general overview of the estate, gift, generation-skipping transfer (GST) and basic income tax rates for 2017.

Estate tax: Generally, a person dying between Jan. 1, 2017 and Dec. 31, 2017, may be subject to an estate tax, with an applicable exclusion amount of $5.49 million (increased from $5.45 million in 2016). The top marginal rate remains 40 percent.