2018 Private Wealth Services Year End Update Letter

We hope the information in this letter is helpful to you as 2018 winds to a close. If you have any questions, please contact Gunster's private wealth services practice. Best wishes for a healthy and joyous holiday and New Year.

Midterm elections: High turn out, low certainty

While Floridians anxiously await the final certification of the results of Florida’s three highest profile contests, the overall results are a bit more definitive on the federal level. Democrats now make up the majority of the House of Representatives while the Republicans appear to continue to hold a narrow majority in the Senate. A divided Congress traditionally means that new laws come dearly.

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2019 state, gift and GST tax exemption and exclusion levels

Making gifts of appreciating or income producing property to younger, lower income generations can be a fruitful tax savings strategy because those younger generations often have a lower effective tax bracket and all post-gift appreciation accrues outside of the donor’s gross estate (i.e., estate tax base). When making lifetime gifts, it is important to consider the tax exemptions and exclusions that are currently available.

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Business owners: Get the most out of the qualified business income deduction while you can

One of the most talked about changes coming from the New Tax Act is the deduction for qualified business income. The discussion has involved how significant the new deduction could be for closely held business owners and also how many parts of the new law required clarification. In very basic terms, you can receive a deduction against federal income equal to up to 20% of your US business income received from partnerships, Subchapter S corporations, or even single member LLCs for all tax years beginning before Dec. 31, 2025. What is so unusual is that the deduction is generally available simply because your qualified business income “flows-through” to your income tax return.

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While the federal estate tax exemption jumps, many state level exemptions remain grounded

Sixteen states and the District of Columbia have either an estate or inheritance tax. For a number of years, several of the states with their own state level estate tax have maintained a policy of aligning their estate tax laws with the federal laws. This allows a certain level of administrative simplicity and piggybacking of federal level rulings and interpretations. Times - they are a chang’n, however. Over the last year or so, a number of states with estate tax exemptions tethered to federal law have decided that they can’t afford to follow where the federal exemptions are going. It appears that states were ready for an estate tax exemption equal to $5,600,000 but it seems that $11,180,000 was a bridge too far.

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The IRS is not amused by state legislatures' SALT limitation avoidance tactics

Starting this year, individuals are limited to deducting up to only $10,000 of state and local taxes (SALT) paid against their federal income tax. To many people this change was obvious political retribution against high tax “blue” states but to others the change was a long overdue elimination of the subsidization of those same states’ budgets. Regardless of your view of the limitation, the significant increase in the standard federal income tax deduction means that the SALT limitations affect a relatively small percentage of taxpayers – about 5% according to the IRS. This has not stopped the legislatures in states like New York, New Jersey, Massachusetts and California from considering, or at least loudly discussing, ways to counteract the SALT limitations.

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Qualified Opportunity Zone investments are given significant tax preferences

With the new tax act, Congress has attempted to create a potent incentive to invest in economically disadvantaged census tracts referred to as “opportunity zones.” The inducements are significant.

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Significant changes to the taxation of alimony

The award of alimony is a very common result in a divorce that requires a spouse with greater financial resources to support a former spouse. In Florida, alimony is often granted to be rehabilitative but it can also be durational or permanent. Traditionally, the receipt of alimony is included in income and the payment of alimony is income tax deductible. However, alimony paid in connection with a divorce agreement executed (or potentially modified) after December 31, 2018 will no longer be deductible and alimony received will no longer be subject to income tax.

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New opportunity to rescue trusts with unfortunate terms

There are plenty of compelling reasons to execute and fund irrevocable trusts. The downside, however, is that once a trust is irrevocable, the grantor is not generally able to change the terms of a trust. Many irrevocable trusts appoint successor trustees who are appropriate at the time of execution but years later the appointment makes very little sense. It might also surprise you that, every once in a while; someone wants to get rid of one of the trust beneficiaries or extend the time for when trust assets are distributed outright to a beneficiary. Occasionally a do over is desired. This is where trust decanting comes into play. Decanting is a legal process which allows the trustees to distribute trust property from one trust, presumably with one or more undesirable terms, to another trust with presumably more desirable terms.

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Battle over states' right to tax trusts ongoing across US

For a variety of reasons, including warm weather and low taxes, Florida attracts people who have lived a significant portion of their lives elsewhere. As a result, it is common for the trustees and beneficiaries named in estate plans to live in other states, often multiple other states. Considering the residence of trustees and beneficiaries has gotten more important in estate planning over the years as state budgets have gotten tighter and state tax laws, particularly the enforcement of those laws, has gotten more aggressive. While Florida does not have an individual or trust income tax, many states are attempting to tax irrevocable trusts which share some connection, however thin, to those states. Taxpaying trusts though are in some cases convincing courts that those attempts are out of bounds.

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Estate plan review and monitoring changes in the law

We recommend that you review your estate plan periodically to ensure it is updated taking into account your current family situation, your current asset structure, your dispositive wishes, tax provisions currently in effect, and your trustee selections. Each of these aspects of your plan necessarily changes over time. The New Tax Act has granted us a variety of new opportunities but some of those planning opportunities have a limited shelf-life. Now is the time to take advantage of such opportunities. You should also check to make sure that your assets are properly titled, and beneficiary designations for insurance, retirement plan and annuities are properly completed, so that your estate plan operates as intended.

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