3 Year-End Planning Strategies

Dec 21, 2018 6:00:00 AM



The holiday season may be the busiest time of the year for estate planners. With family on their minds, your clients may be reaching out to you for last-minute estate plan changes, or to make good on a promise to update their estate plan. It’s also the perfect opportunity to make sure your clients’ estate plans are designed to take advantage of current tax law and proposed regulations. Here are three year-end strategies (beyond the most common strategies) to help you meet your clients’ needs.  

1. Utilize Gift Interests in a Family LLC

Last year, the Trump administration made a move to delay or suspend tax regulations that “imposed an undue financial burden on U.S. taxpayers.” One such proposed regulation—Section 2704 of the Internal Revenue Code—was withdrawn because it was found to unduly hurt family businesses by limiting their valuation discounts. These discounts (called minority interest and marketability discounts) are attributed to membership interests in an FLLC due to the lack of marketability and lack of control that a member has over the asset. Depending on how much control the transferors have, these discounts on the value of the membership interest can be as high as 40%; thus allowing parents to give gifts beyond the annual gift exclusion amount ($15,000 in 2018). These discounts are also applied when valuing an FLLC interest for estate tax purposes, often resulting in significant estate tax savings.

With the ability to once again take advantage of these valuation discounts, estate planners should revisit this planning strategy for clients looking to transfer wealth and protect their assets.

2. Incorporate charitable giving

Despite the worry that the recent increase in the standard deduction would negatively impact philanthropic activities, charitable giving is projected to hold steady and possibly even grow this year due to earlier record stock market gains. This suggests that charitable giving will still be important to many of your clients. Historically, 30% of charitable giving activity takes place during the holidays, so December is the perfect time to help clients incorporate their philanthropic desires into their estate plan.

Since the standard deduction may no longer be an option for some clients, your charitable giving strategies may consist of a combination of lifetime and after-death giving in order to maximize the current tax benefits. Lifetime giving allows active clients to be more involved in their charitable giving while offering the opportunity for income tax deductions. Two of the most prominent lifetime and after-death estate planning tools are Charitable Remainder Trusts (CRT) and Charitable Lead Trusts (CLT). Both types of trusts provide a stream of income to be distributed to a designated party during the term of the trust. In a CRT, the beneficiaries receive the income interest upfront and the charity collects the trust’s remaining assets at the end of the trust’s term. The CLT operates in the exact opposite with the charity receiving the stream of income and the beneficiary getting the remaining assets at the end. There are also significant differences in the income tax deductions available under these two types of trusts, so attorneys should evaluate which is best suited for each client’s situation.

3. Revisit your clients’ 199A deduction

On August 8th, the IRS released proposed regulations that have answered many questions regarding 199A deductions. While the new regulations make it easier to estimate how much of a deduction that a client is entitled to, they also offer clarification on planning strategies that might be worth talking to your business clients about before the tax year ends.

For instance, under the new “reasonable method” allocation, owners of multiple businesses have some flexibly to determine the allocation of certain items, such as income, expenses, and property among separate businesses. Additionally, the proposed regulations also included an anti-abuse rule concerning the treatment of multiple trusts that attempt to get around QBI limits. In circumstances where two or more trusts have substantially the same grantor and beneficiaries, proposed § 1.643(f)-1 states that the trusts will be treated as a single trust for federal income tax purposes. Estate planners should revisit any plans that may be affected by these rules.  

Lastly, the newly proposed regulations also narrow the definition of  what businesses count as a specified service trade or business (SSTB). For example, the term “brokerage services” no longer includes services provided by real estate agents, brokers or insurance agents; “health services” does not include health clubs or spas; and “investment services” does not include property management businesses. Due to these changes, it is worth contacting clients who may no longer qualify as an SSTB under these new regulations to reassess their income tax plans.

Wealth Docx® can help you with all your end-of-year planning strategies. Draft operating agreements for clients who want to start an FLP or FLLC and use our charitable planning module to draft CRTs and CLTs.

Expand your services (and your practice’s revenue) by adding Business Docx® to your WealthCounsel membership and be there for all your business clients’ needs—from formation and start-up, to general operation and buy-sell agreements.

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