Estate Planning After the 2017 Tax Act Kirsten Burmester Beth Shapiro Kaufman Megan E. Wernke

Overview Brief summary of relevant provisions of Act Case Studies: Planning Discussion

Estate, Gift, GST Basic exclusion doubled No change to basis rules Increased from $5 million to $10 million, indexed from 2011 Expected exclusion for 2018: $11.18 million Chained CPI-U No change to basis rules No rate change Doubled exclusion sunsets 12/31/2025 Clawback concerns

Individual Income Taxes Top bracket declines to 37% Tax rates the same or lower at all income levels Trust and estate rates still compressed Kiddie tax: applies trust and estates brackets 37% at $12,500 and over

Deductions for Individuals Standard deduction increased ($24,000 married, $12,000 single); no personal exemptions $10,000 limit for state, local and foreign taxes Limited deduction for home mortgage interest Suspension of deduction for interest on home equity indebtedness Repeal of Pease limitation on itemized deductions Elimination of alimony deduction (2019) Suspension of deduction for itemized deductions previously subject to 2% floor

Deductions for Trusts Same limitations as individuals with regard to state and local taxes Distribution deductions under Section 651 and 661 are still available  Personal exemption continued for trusts and estates Can still deduct expenses that would not have been incurred but for the existence of the trust or estate (e.g. trustee fees, appraisal fees, trust accountings)

Other Changes for Individuals Alternative minimum tax retained, exemptions increased Roth IRA conversions allowed, reversing it disallowed 529 Plans expanded to qualified expenses for elementary and high school education, up to $10,000 per student per year Limited rollovers from 529 account to ABLE account Increased limits for charitable donations of cash to public charities (60% of AGI)

Taxation on U.S. Businesses C Corporations Corporate income tax flat rate of 21 percent Corporate AMT repealed Corporate net operating losses limited No sunset

Taxation on U.S. Businesses Flow-Through Entities Deduction of 20% of qualified business income under new Section 199A Subject to limitation to greater of: (i) 50% of the taxpayer’s allocable share W-2 wages; and (ii) 25% of the taxpayer’s allocable share of W-2 wages plus 2.5% of depreciable property in service.

Taxation on U.S. Businesses Flow-Through Entities cont. Income must be earned in a “trade or business” Income items such as capital gain/loss, dividends, interest, commodities transactions, hedging, currency gains are excluded However, qualified REIT dividends, qualified income from publicly-traded partnerships and qualified cooperative dividends can be deducted

Taxation on U.S. Businesses Flow-Through Entities cont. Threshold amount is $315,000 for married couples and $157,500 of all other taxpayers Limitations phase in at income over $100,000 for married couples and $50,000 for all others Top marginal rate of 29.6% (37% top rate * 20% deduction=29.6%); plus 3.8% Net investment income tax =33.4%, if applicable Sunset provisions apply

International Estate Planning Exemption for NRAs remains at $60,000 No change to rate schedule or definition of U.S. situs property

Case Study A Akiko is a widow whose husband died in 1995 She and the children are beneficiaries of a credit shelter trust originally funded with $600,000 Current value of trust assets = $1,000,000 Akiko’s other assets are valued at $3,000,000 Akiko is 89 years old

Case Study B Bing and Bonnie are 65. They have two children and four grandchildren. They live in Virginia (no state estate tax). They have assets of $10 million Current estate plan relies on portability Variations: Live in state with estate tax Second marriage, they each have two children and four grandchildren Assets of $20 million Age 85

Case Study C Carlos and Carmen are in their 40s They are both long-term green card holders living in California They have three minor children They have assets in excess of $100 million, largely from the sale of a business Carmen started and sold Both Carlos and Carmen are currently involved with new start up businesses

Case Study D Dieter is a non-resident alien, age 76 His children and grandchildren are US citizens He owns a $50 million portfolio of US equities through a BVI company

Case Study E Eduardo owns a successful construction business worth $20 to $40 million, as well as a large home and other assets Ed and Esther have 5 children, all minors Ed supports his mother Bianca, who is 75, has very few assets, and is in relatively poor health

Case Study F Fatima is a 85 year old widow whose husband Farhad died 20 years ago Prior to Farhad’s death, they formed an FLP and funded it with real property and securities Farhad’s interest in the FLP passed to their 3 children and 3 GST trusts at his death Fatima made gifts of ~$5 million prior to this year Fatima still owns 27% of the FLP (FMV ~$4 million) Fatima has assets outside the FLP (FMV ~5 million)

Case Study G Giselle is a French citizen and resident; she is not a U.S. citizen She plans to purchase a vacation home in Miami Variation: She plans to invest in a rental property in Miami