Estate Planning and Tax Reform

Introduction

Recently, President Trump signed the most significant tax reform in generations. The legislation will have considerable impacts not only on the nation’s economy but also on estate and business planning. Beginning next year, many changes are afoot. Two such changes relate to taxation of estates and certain business entities.

Doubling of the Estate Tax Exemption

The current estate tax exemption is $5 million, indexed to inflation. Tax reform doubles the estate tax exemption for deaths after December 31, 2017. As a result, individuals can now pass up to $11 million (or $22 million for married couples) to their heirs tax-free. Given the increased estate tax exemption, clients should revisit existing estate plans. In particular, there exists an opportunity to simplify complex trusts.

Deduction for Pass-Through Businesses

The term “pass-through business” refers to one in which the owner reports business income on their personal tax return. Examples of pass-through businesses include partnerships and LLCs taxed as S corporations. Tax reform created a new 20% deduction for owners of pass-through businesses. While there are limitations for certain service-oriented businesses such as doctor’s offices and law firms, the new deduction is a potentially major tax break for small businesses. Consequently, small businesses presently structured as a C corporation should consider reorganizing as a pass-through entity.

Conclusion

It remains to be seen how tax reform will operate in practice, and estate and business planning strategies will be refined as the IRS fills in the details over the coming months. Nevertheless, now is the time to take advantage of tax reform’s benefits, especially the increased estate tax exemption and the preferential treatment of pass-through businesses.