There still are seven tax brackets, although the top tax rate is reduced to 37% applicable to income over $600,000 for married couples filing jointly or $500,000 for a single taxpayer.  The standard deduction has been increased to $24,000 per couple or $12,000 if single.  The personal exemption has been eliminated, and if you take the standard deduction next year you will not be able to deduct charitable gifts (so make them this year).  Itemized deductions now limit mortgage interest deductions to the interest paid on $750,000 of acquisition indebtedness, and the limit is $10,000 for couples ($5,000 for married filing separately) for combined state and local income, sales, and real property taxes.  “Carried interest” retains capital gains treatment, but requires a 3 year holding period.  What has not changed is the 3.8% tax on “net investment income,” 20% capital gains rate, retirement savings limits and (with some minor adjustments) the alternative minimum tax (AMT) and Kiddie Tax. 


What will affect many of our clients is the increase in the “exempt amount” for all three transfer taxes from a projected $5.6 Million in 2018 to $11.2 Million per person ($22.4 Million for married couples), but that increase is scheduled to expire at the end of 2025.  So has this simplified the estate planning process?  HARDLY!

For years professionals have been using “formula clauses” in testamentary documents (Wills and Living Trusts) which either provide that the maximum amount passing to a surviving spouse is that amount which would reduce the taxable estate to zero, or a direction that the maximum amount eligible for the estate tax exempt amount will pass into a “Credit Shelter Trust,” “By-Pass Trust” or “B Trust.” The increase in the exempt amount to $11.2 Million would mean that any estate with up to that amount of assets would require all assets to pass into the Credit Shelter Trust with nothing passing to the surviving spouse.  Even in a non-married situation, if the single person described the assets passing to Generation Skipping Trusts or Dynasty Trusts for the benefit of children and then grandchildren as being the amount eligible for that exempt amount, if the estate is equivalent to the GST exempt amount, then all of the assets would pass into those Trusts with nothing passing outright under other provisions to children, grandchildren or other beneficiaries.

And what happens if the client alters the Will or Living Trust language to accommodate the new exempt amount, and then in 2026 the law changes?  Now we may need to include more language to cover both periods and scenarios in current Wills and Living Trusts.  

The bottom line is that all clients with “formula clauses” will need to have their documents reviewed immediately, and even clients without those clauses should re-evaluate their plans.  Annual or bi-annual reviews are strongly recommended. 

Much planning lately has been directed at ensuring asset protection for future generations.  Simply changing documents to provide that all exempt amounts will pass outright to family members would defeat that purpose.

In addition, significant planning can be undertaken to use the newly added transfer tax exempt amounts to extricate additional assets from sizeable estates and ensure that future growth in the taxable estate is limited. As we have referenced in prior tax letters, these could include Grantor Trusts (including GRATs), Qualified Personal Residence Trusts (QPRTs), Spousal Lifetime Access Trusts (SLATs), simple Irrevocable Trusts for general assets and life insurance, and Family Partnerships and Family LLCs for enhanced family planning.

CORPORATE TAX CHANGES will be addressed in a separate newsletter.





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