The US tax laws have brought major changes to the provisions of the Internal Revenue Code that affects the high net worth individuals, their family offices, and investment entities. These new changes are bound to leave considerable impact in gift planning and bring up new compensation arrangements within family offices. It is also expected to raise questions on conversion to corporate forms and increase the reliance on trusts to safeguard from state income taxes.
The major impacts on gift planning
The new laws have doubled the amounts that an individual is allowed to transfer free from gift and federal estate tax and the GST (Generation-Skipping Transfer) tax. Back in 2017, every individual received a GST, gift tax, and estate exemption of $5.49 million. Starting from 1st January, 2018, the exemptions were raised to about $11.2 million, which was indexed due to inflation in the years to come.
Expert tax advisor, Matthew Ledvina, points out that these higher exemption rates will return to the lower pre-reforms levels after 31st December, 2025. This means that the high net worth individuals must consider gifts that are equal to the increased exemption amount before this date. A property gifted in 2018 would be able to use the individual’s exemption better than the gift in 2025.
Income tax planning for high net worth individuals
The changes made to the income tax regulations affecting trusts and individuals will also expire on 31st December, 2025, and the pre-act regulations will apply. The top income tax rate now stands at thirty-seven percent instead of being over thirty-nine percent. However, the elimination of crucial income tax deductions, like local and state income taxes will make high net worth individuals rely more on trusts that aren’t subject to local or state income taxes.
Several miscellaneous deductions have been eliminated, such as tax preparation costs and investment management costs. However, family offices can still make these items deductible by showing them as business or trade expenses. They can also structure the payments as the profits interest and not a fee.
Going to corporation from conversion
The corporate tax rates have been reduced to twenty-one percent from the top rate of thirty-five percent. The rate of deduction will not expire on 31st December, 2025, unlike the provisions used for estates, trusts, and individuals. The corporations withhold the ability of deducting local and state income taxes. Matthew Ledvina says the factors might lead the high net worth individuals to reconsider holding investment assets using corporations.
The added shareholder taxes imposed on assets removed from the corporation might make it not worthwhile to reconsider holding the assets. Any taxes on appreciation in the assets that the corporation holds that might not have been imposed in some cases can also make a case against reconsideration.
It is important to discuss the details of it with an experienced tax advisor to understand the new saving options available to high net worth individuals.