There are competing “tax reform” proposals in Washington, all subject to debate, lobbying, revision and legislative vote. The final outcome is still undetermined and these proposals are not yet law. We can assist you in anticipating the coming tax changes and planning ahead.
Many clients are asking us: if the estate tax threshold is increasing to $11 million per person, and income taxes may be reduced, why should they care about tax minimization techniques? We offer the following answers:
- Just as the laws are changing now, the laws could change again (as soon as 2018, after mid-term elections, and if a new president is elected in 2020). Proper planning now preserves current tax benefits and provides certainty in uncertain political times.
- Proper tax planning also provides for:
- Family governance and centralization of family assets
- Legacy and succession planning (including family business and personal assets)
- Income to beneficiaries
- Specific family concerns and special needs children
- Charitable considerations
- Locking in “basis” for appreciated assets (from real estate to virtual currencies) in uncertain fiscal and political times
- Gift tax planning. Under the current House of Representatives tax reform plan, while estate and generation-skipping taxes may be repealed or curtailed, gift tax would remain. This presents a favorable opportunity to fund trusts.
- Asset protection and wealth preservation
- Estate tax minimization on the state level. While Congress debates repealing the estate tax or increasing its threshold to $11 million, state estate taxes are still law in many states, including New York.
- Preserve portability of one spouse’s estate tax exemption. While Congress allowed for portability on the federal level (back in 2012), in many states (including New York) there is no portability unless through proper estate and trust documents.
Here are a few suggestions for effective end-of-year tax planning, even while the federal tax laws continue to change:
- If we can expect reductions in income tax rates next year, consider whether to utilize tax deductions and losses in 2017 and postpone or defer gains and income until 2018.
- Take charitable deductions now, rather than in 2018, when tax changes could make deductions less valuable.
- Consider an enhanced role for life insurance and an Irrevocable Life Insurance Trust (ILIT). Insurance proceeds are not taxable as income to the beneficiary. Growth within an insurance policy is not subject to capital gains tax nor other income tax. If the estate tax will be repealed (or the estate tax threshold doubled to $11 million per person), insurance could still be completely tax-free. Insurance could thus play an enhanced roll in family planning, legacy planning, liquidity and tax-minimization. An ILIT would add further benefits, including asset protection, creditor protection and extended wealth management for child beneficiaries.
- Pay mortgage interest and state and local taxes in 2017. In 2018, these payments may not be deductible.
Please contact us to discuss strategies to lower your tax liability and preserve current tax benefits.