As you may be aware, the tax reform legislation from 2017 impacts not only the federal income tax but also other taxes potentially affecting your estate plan (such as the estate, gift, and generation-skipping transfer taxes (“GST”)).
The legislation doubles the estate, gift and GST tax exclusion amounts to $11.2 million in 2018 (to be adjusted for inflation from a base year of 2010). These increases are effective for decedents dying and transfers made after 2017 and before 2026. Due to these changes, it may be necessary to adjust certain provisions in your plans where you may have previously created formulas for gifting and estate allocation based on lower estate tax exemption amounts. Such older formulas could result in unintended consequences in this higher federal estate tax exemption environment, including unintended disinheritance of certain beneficiaries or higher taxes if certain gifts are “overfunded” because of the new exemption amounts.
After 2025, the increased federal estate tax exemption amount is scheduled to sunset, returning the exclusion amount to an amount calculated under current law ($5.49 million for 2017). Please note that Oregon’s estate tax exemption remains at $1,000,000 and is not indexed for inflation.
Additional changes to individual, corporate, and pass-through entity taxation provisions may also impact estate plans. Some of the provisions included in the law that may affect your plans include:
- New deduction for certain business income earned through pass-through entities. The legislation creates a new deduction for individuals, generally equal to 20% of the qualified business income received by the individual from a pass-through business. Certain service businesses (such as law, accounting, investment management, etc.) have special limitations, 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.
- 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.
- Extension of the holding period for “carried interest.” The legislation prevents individuals holding so-called carried interest in private equity or hedge funds or similar investment vehicles from claiming long-term capital gain treatment on gains realized from the disposition of such an interest until the interest has been held for three years (compared to the one-year holding period required for other capital assets). The legislation also creates certain restrictions on related-party transfers of carried interest during a similar three-year period.
In light of the numerous changes made by this tax 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. If it has been a few years since you have updated your plan, now would also be a good time to touch base with us to make sure trust funding, beneficiary designations, and other details are up to date.