Dear Clients and Colleagues:

This letter is an update on the most recent estate and gift tax developments. The Tax Cuts and Jobs Act of 2017 (the “Act”) signed into law by President Trump on December 22, 2017, made many changes to (1) Estate, Gift, and Generation-Skipping Transfer Taxation, (2) Corporate/Business Taxation, and (3) Individual Taxation. This letter highlights aspects of the Act that impact most of our clients. However, there have been many changes, and only through individual consultation can we adequately assess how the changes will impact your individual situation.

Estate, Gift and Generation-Skipping Transfer Taxation

The Act doubles the estate tax, lifetime gift tax and generation-skipping transfer (“GST”) tax exemptions beginning in tax year 2018. Exemption amounts will continue to increase with yearly inflation adjustments through tax year 2025. The Act maintains the current estate tax rate, gift tax rate and GST tax rate of 40% for amounts above the exemption. The Act also preserves the stepped-up basis treatment of assets at date of death.

The new transfer tax exemptions for 2018 are as follows:

  • $11,180,000 federal estate tax and lifetime gift tax exemption (increased from $5,490,000 in 2017) and a 40% top federal estate and gift tax rate

  • $11,180,000 GST tax exemption (increased from $5,490,000 in 2017) and a 40% top federal GST tax rate

  • $15,000 annual gift tax exclusion (increased from $14,000 in 2017)

  • $152,000 annual exclusion for gifts to a noncitizen spouse (increased from $149,000 in 2017)

These increased exemptions create opportunities to make larger lifetime gifts, to leverage more assets through a variety of estate planning techniques and to shift income producing assets to individuals such as children or grandchildren, who may be in lower income tax brackets and/or reside in states with a low income tax rate or no state income tax.

As a reminder, unlimited tax-free gifts can be made for medical and educational expenses, but only if the payment is made directly to the medical provider or educational institution.

Absent further legislation, in tax year 2026 the exemption amounts will revert back to prior levels under the American Taxpayer Relief Act of 2012 (an inflation indexed $5,000,000). As a result, the planning opportunities offered by the increased exemption amounts (doubled) may only be temporary in nature. However, gifts that utilize the increased exemptions prior to the expiration of the Act create an effective planning strategy.

Portability planning may take on greater importance given the temporary nature of the increased exemption amounts under the Act. With portability, a deceased spouse’s unused estate and gift tax exemption can be transferred to and used by the surviving spouse at his or her death. The election can only be made on the deceased spouse’s U.S. estate tax return (IRS Form 706). The IRS recently issued Revenue Procedure 2017-34 which allow a surviving spouse to file a federal estate tax return solely to elect portability within two years of their spouse’s date of death, provided that the surviving spouse meets certain requirements.

2017 Gift Tax Returns

Gift tax returns (IRS Form 709) for gifts made in 2017 are due on Tuesday, April 17, 2018. You can extend the due date to October 15, 2018, with a timely filed request for an automatic extension to file your 2017 income tax return, which also extends the time to file your gift tax return. However, such extension does not extend the time to pay any such taxes due.

Corporate/Business Taxation

One of the most talked about provisions of the Act is the deduction for certain “pass through” income. This provision creates a new 20% deduction for certain ordinary business income earned by owners of sole proprietorships, partnerships, S-corporations and limited liability corporations. The purpose of this provision is to create a tax cut similar to that of the corporate tax rate for businesses organized in a form other than C-corporations. The deduction does not apply to wages or compensation earned by the business owner.

In general, for married taxpayers filing jointly with taxable income under $315,000 ($157,500 for single taxpayers) the only limit on the deduction is a cap at 20% of taxable income minus capital gains. For taxpayers over this threshold, the deduction is limited to the greater of 50% of the business’ W-2 wages or the sum of 25% of the W-2 wages and 2.5% of the cost of depreciable business property, and is further limited to exclude most service businesses.

This new deduction is only effective for tax years 2018 through 2025. Due to the limited duration of this deduction and the restrictions for taxpayers with income over the threshold, any planning to take advantage of the new deduction should be carefully analyzed in consultation with your income tax advisor.

Individual Taxation Updates

The Act makes many changes to individual taxation, some of which are listed below. However, this update is not all encompassing, as the Act made many changes which may or may not impact your individual taxes. You should consult your CPA or other income tax advisor for a complete picture of how the Act can impact your individual taxes.

Personal Income Taxation. Although the standard deduction has been increased to $12,000 for single taxpayers, and $24,000 for married taxpayers filing jointly (increased from $6,350 and $12,700, respectively), the personal exemption and a staggering amount of the miscellaneous itemized deductions have been eliminated. For the important deductions that do remain, there are significant reductions. The state and local tax deduction (including real property tax) is limited to $10,000 per year (regardless if filing single or married). Also, the mortgage interest deduction is capped to the first $750,000 of a new mortgage (HELOC interest is also no longer allowed). Absent further legislation, in tax year 2026 the changes to the personal income taxes will revert back to prior levels under the American Taxpayer Relief Act of 2012.

Charitable Contribution Changes. The percentage limit of adjusted gross income (“AGI”) deductible for charitable contributions of cash to public charities is increased from 50% to 60%. The percentage limit of AGI deductible for charitable contributions of appreciated assets, such as stock, remains at 30%. No changes have been made to the Individual Retirement Account (IRA) charitable rollover provision, allowing required minimum distributions from IRAs to charitable organizations in amounts up to $100,000 ($200,000 for married couples filing jointly) income tax-free if certain requirements are met. The Act eliminates the ability of a donor to take an 80% deduction for payments to educational organizations for the right to purchase tickets for seating at an athletic event in an athletic stadium.

Section 529 Plans.  The Act provides that funds in 529 accounts can be additionally expended for enrollment or attendance at elementary or secondary public, private, or religious schools. Expenses can be for curriculum and curriculum materials, books or other instructional materials, online educational materials, tuition for tutoring or educational classes outside of the home (but only if the tutor or instructor is not an immediate family member), dual enrollment in higher education, and educational therapies for students with disabilities. Total expenses for elementary or secondary schools are limited to $10,000 per calendar year.

Estate and Gift Tax Exemption for Same-Sex Couples.  Same-sex married couples can retroactively claim marital deductions and recalculate GST tax exemption. IRS Notice 2017-15 provides that, even if the limitations period for previously filed returns or assessment of taxes has passed, taxpayers can amend estate (IRS Form 706) and gift tax returns (IRS Form 709) to recalculate estate and gift tax exemption amounts.

Carried Interest Holding Period. The Act increases the holding period for treatment of distributions from a partnership which are characterized as “carried interest” to be treated as long-term capital gains from one year to three years.

Estate of Powell. If you have an entity that is either a limited partnership (“LP”) or a limited liability company (“LLC”) and have either transferred (through gift or sale) interests in that entity to others, or have transferred property to others who, along with you, have transferred that property to that entity, the recent United States Tax Court case, Estate of Powell v. Commissioner, 148 T. C. No. 18 (2017), has introduced some new law that may necessitate action by you in order to keep previously transferred interests in LPs and/or LLCs from being included in your own estate when you pass away. Accordingly, if you have such an LP and/or an LLC, we recommend a review of your estate plan with one of our attorneys.

How do these changes affect your existing Hopkins & Carley estate planning documents?

The estate planning documents that we prepare are designed to be flexible and, in general, their overall structure remains unaffected by the increased exemption amounts. There may, however, be instances where you should consider updating your documents to reflect changes made by the Act. For example, by utilizing the portability rules, many married couples can simplify the administration of their revocable living trust after the first spouse’s death. Also, estate plans that are designed to allocate or distribute amounts based on the available estate tax exemption should be reviewed to ensure that the new, higher exemption levels are consistent with the original objectives of the plan.

We typically recommend a review of your estate plan with one of our attorneys every two or three years. Reasons that you may need to modify your plan include:

  • An increase or decrease in the size of your estate;

  • Acquisitions of major assets, including life insurance;

  • Change in your marital status or that of your children (marriage, divorce or separation);

  • Additions to your family through birth, adoption or marriage; or

  • New thoughts about who should administer funds for your heirs, or how and when your heirs should receive your estate.

Other Hopkins & Carley News

Family Wealth and Tax Planning Group

Our Family Wealth and Tax Planning (FWTP) Group has added two new attorneys and two new paralegals to make us the largest trusts & estates practice in Northern California:

Jennifer Mispagel is an associate in the FWTP Group, based in our San Jose office. Prior to joining Hopkins & Carley, Jennifer was with Lonich & Patton, LLP, in San Jose. 

Vern Adkins is an associate in the FWTP Group, based in our Palo Alto office. Prior to joining Hopkins & Carley, Vern was with Boston Private Bank & Trust Company in San Jose. 

Our new paralegals are Narges Sayid (based in our Palo Alto office) and Kimberly Honeycutt (based in our San Jose office). 

Peter LaBoskey has retired from the active practice of law but remains Of Counsel to the firm on an ongoing but limited basis.

James Quillinan has retired from the active practice of law but remains available as a mediator through Hopkins & Carley’s new Dispute Resolution Services.

As always, we look forward to assisting you and your family with your estate planning needs. If you have any questions or would like to discuss any of the above issues in more detail, please feel free to contact any one of our FWTP attorneys listed below:

Vern Adkins
Martin Behn
Dan Cooperider
Darin H. Donovan
John P. Golden
James M. Hager
Peter LaBoskey
Laurie-Ann D. Look
Jennifer L. Mispagel
Charles H. Packer
James V. Quillinan
Bruce B. Roberts

Richard J. Schachtili