Three themes to help maximize your wealth planning potential.
- Estate tax planning: Take advantage of today’s higher estate, gift, and generation-skipping transfer (GST) tax exemption.
- Income tax planning: Take advantage of other state jurisdictions to reduce or mitigate your current (or future) state and local income taxation.
- Charitable planning: Take advantage of the “last deduction standing” for charitable planning.
For the first time in over 30 years, the U.S. tax code saw sweeping changes with the passage of the 2017 Tax Cuts and Jobs Act. This is a brief overview of some of the critical developments we believe are important to high-net-worth individuals, families, and business owners. We frame these developments in the form of corresponding emerging themes and also propose actionable potential strategies—depending on your unique circumstances and goals—to bring these themes to life.
It’s important to note that many of the provisions of the current tax law are scheduled to sunset after December 31, 2025, at which time the prior provisions of the tax law would return if no further legislative action is taken. Further, given the nature of politics and fiscal realities, there always exists a very real possibility that the estate tax law will be modified prior to 2025.
Estate tax planning
Take advantage of the current higher estate, gift, and generation-skipping transfer tax (GST) exemption. Increased exemption amounts— even if temporary—create an opportunity to utilize strategies to “lock in” the exemptions and minimize future transfer taxes, even if the higher exemptions expire at some later date. Such strategies may include taking advantage of lifetime gifting opportunities with the extra higher exemption amount and in some cases, it may involve revising an existing estate plan.
Strategy: Lifetime gifting opportunities
There are a variety of ways that individuals can utilize this lifetime gifting opportunity. Married couples may consider forming non-reciprocal, spousal lifetime access trusts (SLAT). Individuals interested in potential creditor protection may form and transfer assets to self-settled domestic asset protection trusts (DAPT). The additional exemption may be used to transfer existing life insurance policies to an irrevocable life insurance trust (ILIT). Finally, utilizing a sale to an intentionally defective grantor trust (IDGT) may provide an opportunity to further leverage the additional exemption.
Revisit your existing estate planning if your income tax savings will now outweigh your transfer tax benefits.
Strategy: “Turn off” the grantor trust feature
By removing this feature from an existing trust so that it becomes a non-grantor trust, the trust becomes its own taxpayer. With the new higher estate tax exemptions, some of the pressure on estate tax minimization may be relieved. If the trust is administered in a tax-friendly state such as Delaware, it may be possible to turn off payment of state taxes on the trust’s income.
Strategy: Substitution of trust assets
Irrevocable trusts can be specifically drafted to grant an individual the power to swap assets of the trust with assets that the grantor holds individually. Low cost basis trust assets can be substituted for high cost basis assets held by the grantor individually. The low cost basis assets now held by the Grantor would be eligible for a step up in basis upon the grantor’s death.
Income tax planning
Take advantage of other state jurisdictions to reduce or mitigate your current (or future) state and local income taxation (especially for those in high income tax states). With the ability to utilize State and Local Tax (SALT) deductions significantly reduced and capped at $10,000 per year under the current tax law, income tax mitigation may be more important than ever.
Strategy: DING Trusts
Individuals in high income tax states may consider establishing and funding Delaware incomplete non-grantor (DING) trusts. The grantor of a DING trust retains ownership of the assets for gift tax purposes while the trust owns the assets for income tax purposes. The DING trust allows the individual taxpayer to shift the income out of his or her home state into a state such as Delaware where the trust may not pay a state income tax.
Strategy: Designating a corporate successor trustee
Some trusts are best administered by an individual during his or her lifetime, such as a revocable living trust or ILIT. However, appointing a corporate successor trustee in a tax-friendly jurisdiction— such as Delaware—can offer professional management of the trust assets at the same time state taxes may be eliminated. Take advantage of income tax rate disparity. As a result of the reduced corporate tax rate, businesses may find it beneficial to operate in corporate form, especially businesses that do not plan to make current distributions to their equity owners. The relative rate advantage that partnerships had over C corporations has been reduced, and perhaps eliminated, if the deduction for pass-through income is unavailable or is significantly limited.
Take advantage of the “last deduction standing” for charitable planning. While most itemized deductions were eliminated by the new tax law, the charitable contribution deduction was retained, which may assist taxpayers with their income and estate tax planning concerns. An income tax charitable deduction may be afforded to taxpayers for lifetime contributions made directly to charity or through a charitable vehicle, while removing the contributed asset out of the donor’s estate. Also, bequests directly to charity or through a charitable vehicle may afford a deceased individual’s estate an estate tax charitable deduction, potentially reducing the estate tax liability the estate may face.
Strategy: Charitable gifting strategies
• Charitable Remainder Trusts
• Charitable Lead Trusts
• Private Family Foundations
• Donor Advised Funds
Wilmington Trust has extensive knowledge and experience with complex trust and estate planning techniques, particularly utilizing the Delaware advantage. Please contact your advisor to discuss your unique situation.
Please see important disclosures at the end of the article.Download Article