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JK lassers new rules for estate, retirement, and tax planning


Table of Contents
Cover
Acknowledgments
J. Winston Busby, Esq., LLM
Stewart Welch III, Accredited Estate Planner, Certified Financial Planner®
Introduction
CHAPTER 1: Tax Cuts and Jobs Act of 2017
Ordinary Income Tax Rates
Capital Gains Tax Rates and Qualified Dividends
Educational Provisions
Business and Corporate Tax Relief
Estate, Gift, and Generation Skipping Transfers
Dangers of Relying on Portability
Limitations on Deductions
CHAPTER 2: Estate Planning
What Is Estate Planning?
The Benefits of Estate Planning
The Nightmares of Poor Planning
The Myths of Estate Planning
Guidelines for Successful Estate Planning

CHAPTER 3: The Estate Tax System
Determining Your Estate Net Worth
Your Estate Tax Picture
Your Future Estate
Overview of Estate Planning Strategies
CHAPTER 4: Investment Strategies for Maximizing Estate Growth
Growth Strategy with a Safety Net®
Prioritizing Your Investment Dollars
Retirement Planning: Choosing the Best Investment Environments
Roth Conversions
Some Final Thoughts on Investing
CHAPTER 5: Retirement Planning: Living Your Dream
Your Retirement Requirements
Best Retirement Strategies


Reverse Mortgages
Social Security Strategies
Customizing Your Health Care Plan
CHAPTER 6: You Don't Have a Will? Big Trouble!
Property Transfers at Death
Transfers via Probate
Direct Transfers by Title
Other Methods of Property Ownership
Choosing the Best Methods of Ownership
Setting Estate Planning Goals
CHAPTER 7: Where There's a Will, There's Your Way!
What Is a Will?
Types of Wills
Advantages and Disadvantages of Wills
Intelligent Decisions Concerning Your Will's Basic Provisions
Executing Your Will
Where to Store Your Will
Other Important Documents
Working with Your Attorney
When to Review Your Estate Plan
CHAPTER 8: Using Trusts in Your Estate Plan
The Credit Shelter Trust Will
Disclaimers
Marital Trusts


Spendthrift Trust
Standby Trust
Other Trusts
CHAPTER 9: Understanding the Living Trust
Advantages of Living Trusts
Disadvantages of Living Trusts
How a Living Trust Operates
Transferring Property into Your Living Trust
Types of Property Likely to Be Transferred
Living Trust Myths
Transacting Business with Your Trust


CHAPTER 10: Using Insurance in Your Estate Plan
Life Insurance
Using Life Insurance to Replace Income
How Much Life Insurance Do You Need?
What Type of Life Insurance Is Best for You?
Insurance on a Homemaker
Insurance on Adult Children
How to Get the Best Deal on Term Life Insurance
What Type of Life Insurance Is Best for Estate Liquidity?
The Irrevocable Life Insurance Trust
Getting Your Life Insurance into Your Trust
Using Life Insurance to Leverage Your Estate
About Your Cash Values
CHAPTER 11: Smart Strategies for Gifting Assets to Family Members
The Annual Gift Tax Exclusion
Unintended Gifts
Filing a Gift Tax Return
The Lifetime Applicable Exclusion Amount
Outright Gifts
When the Donee Is a Minor
Other Tax Free Gifts
Family Gifts Utilizing Trusts
Grantor Retained Annuity Trust
Grantor Retained Unitrust
Qualified Personal Residence Trust
Taking Advantage of Generation Skipping Transfers
Sales to Family Members
Loans to Family Members
Sales to Intentionally Defective Grantor Trusts
The Legacy Trust
CHAPTER 12: Strategic Planning with Charities
Outright Gifts to Charities
Testamentary Gifts to Charities
Gifts Using Charitable Trusts
Using Your Charitable Trust for Retirement Planning


The Private Foundation
CHAPTER 13: Family Limited Partnerships
General Structure of the Family Limited Partnership
Family Limited Partnership Rules
CHAPTER 14: Succession Planning for the Family Business or Farm
Special Estate Tax Benefits for Farmers and Closely Held Business Owners
Valuing Your Business or Farm
Succession or Sale?
Succession Planning: Keeping the Family Business in the Family
Maximizing Your Business's Value through a Sale
Structuring Your Buy Sell Agreement
Types of Buy Sell Agreements
Funding the Buy Sell Agreement
One Final Strategy—The Employee Stock Ownership Plan
CHAPTER 15: Asset Protection Strategies
The Concept of Fraudulent Transfers
A Word about Jointly Held Property
Retirement Plans
Life Insurance
Using Trusts to Protect Assets
Using Limited Liability Entities to Protect Assets
Use of Multiple Limited Liability Entities
Foreign Asset Protection Trusts
Domestic Asset Protection Trusts
CHAPTER 16: Personal Business Planning Issues
Choosing the Right Entity for Your Business
Closing Thoughts
Importance of a Business Plan
EPILOGUE: Dealing with Parents and Their Money
APPENDIX A: Professional Advisers
APPENDIX B: Estate Planning Terms
APPENDIX C: IRS Life Expectancy Table
About the Authors
Stewart H. Welch, III, AEP®, CFP®
J. Winston Busby


Index
End User License Agreement

List of Tables
Chapter 1
TABLE 1.1 Schedule of Individual Income Tax Rates
TABLE 1.2 2018 Tax Relief Act Applicable Exclusion Amount
Chapter 3
TABLE 3.1 Applicable Federal Gift and Estate Tax Exemption Amounts
TABLE 3.2 Federal Gift and Estate Tax Rate Table (Tentative Tax)
TABLE 3.3 Applicable Federal Gift and Estate Tax Credit and Exclusion Amounts
...
TABLE 3.4 The Future Value of Your Estate
Chapter 4
TABLE 4.1 Initial Safety Net
TABLE 4.2 Growth Strategy with a Safety Net®
TABLE 4.3 Retirement Portfolio Equity (Stock) Allocation Guidelines Based on
...
TABLE 4.4 The Power of Retirement Plan Investing
TABLE 4.5 Phase Out of Deductibility of Traditional IRA and Roth IRA
Contribu...
Chapter 5
TABLE 5.1 Social Security Benefits Estimate (2018 estimate)
TABLE 5.2 Social Security Benefits Based on Claiming Age
Chapter 10
TABLE 10.1 $1 Million Term Life Insurance for Male, Age 50
TABLE 10.2 $1 Million Life Insurance Premium Comparison for Male, Age 50 ...
Chapter 11
TABLE 11.1 Applicable Exclusion Amount Increases (2005–2018)
TABLE 11.2 Benefits Comparison of GRAT versus GRUT
Chapter 12
TABLE 12.1 Survivorship Life Insurance


List of Illustrations
Chapter 4
Figure 4.1 Growth Strategy with a Safety Net®
Chapter 8
Figure 8.1 Simple Will
Figure 8.2 Credit Shelter Trust Will
Figure 8.3 Simple Will with Disclaimer Credit Shelter Trust Option
Figure 8.4 Two Trust Will Utilizing a General Power of Appointment Trust and a
...
Figure 8.5 Two Trust Will Utilizing a QTIP Trust and a Credit Shelter Trust...
Chapter 10
Figure 10.1 Millhouse Estate Plan without Irrevocable Life Insurance Trust
Figure 10.2 Millhouse Estate Plan with Irrevocable Life Insurance Trust


Look for these and other titles from J.K. LasserTM—Practical Guides for All
Your Financial Needs
J.K. Lasser's Small Business Taxes by Barbara Weltman
J.K. Lasser's 1001 Deductions and Tax Breaks by Barbara Weltman
J.K. Lasser's Your Income Tax
J.K. Lasser's Your Income Tax (Professional Edition)


J.K. LASSER’S®

NEW RULES FOR ESTATE, RETIREMENT,
AND TAX PLANNING
Sixth Edition

Stewart H. Welch III, AEP®, CFP®
J. Winston Busby, ESQ., LLM


Copyright © 2019 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
The Fifth Edition of Estate and Tax Planning was published by John Wiley & Sons, Inc. in 2014.
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Acknowledgments
J. Winston Busby, Esq., LLM
I would like to thank my wife, Casey Busby, and my daughter, Frances, who was born
shortly after the release of the previous edition. Both were very understanding, especially
Casey, who juggled her career, Frances, and my absence so I could work on this book. I
thank you both.
I am extremely grateful and humbled each day by the chance to learn from and work with
all of the attorneys at Sirote and Permutt and especially the other members of the Private
Clients, Trusts & Estates Group, including Harold Apolinsky, John Baggette, Katherine
Barr, Clay Garrett, Wes Hill, Elizabeth Hutchins, Shirley Justice, Leigh Kaylor, Melinda
Mathews, Howard Neiswender, Tanya Shunnara, Craig Stephens, and Peter Wright.
I would also like to sincerely thank Stewart Welch III for the opportunity to once again
serve as a coauthor with him. Additionally, I would like to thank Harold Apolinsky and
Craig Stephens, each coauthors of previous editions of this book, for graciously allowing
me the opportunity to join this project for the previous edition and to continue their
earlier work with this edition.
Completing this project would not have been possible without the tireless work of my
assistant, Reva Kirk.
I am extremely grateful to Alex Sidwell and Nathan Stotser for their assistance during the
early stages of writing this edition. Finally, I could not have completed this project
without the work and dedication of Alex Sidwell, who served as a research and editing
assistant throughout the project.

Stewart Welch III, Accredited Estate Planner, Certified
Financial Planner®
This book would have never happened without the help and moral support from many
people. First and foremost, I want to thank my coauthor, Winston Busby. Winston is an
extremely gifted lawyer and has been a pleasure to work with on this project. He has
always made himself available when I had highly technical questions…questions to which
he simply knew the answers because he's that smart! Winston's partner, and a senior
partner at his firm, Harold Apolinsky, coauthored several previous versions of this book.
Harold is a brilliant lawyer and true Southern gentleman.
As most of you are aware, insurance can be a very confusing product to understand. Babs
Hart, of Tuscaloosa, Alabama, specializes in long term care insurance, and her input
regarding that section of the text was invaluable. She also provided technical research
regarding the life insurance products discussed in this book.


James (Jimbo) A. King III is co owner of McGowan & King in Birmingham, Alabama;
Jimbo specializes in reverse mortgage lending. He is the man I turn to when I have
questions about reverse mortgages.
I also want to thank John West, CPA, a partner with the accounting firm of RSM US LLP,
in Birmingham, Alabama. Whenever I get stuck on a complex tax question or calculation,
John is the person I turn to for quick, accurate answers.
I am so fortunate to be surrounded by a group of highly talented professional advisers
who each helped me with research for this book project. Greg Weyandt, MPA, CPA, is a
member (partner) of our firm and the chief operating officer, chief financial officer, and
chief compliance officer. Greg runs the day to day operations with near flawless
precision, which allowed me to concentrate on this project. Hugh Smith, CPA, CFP, CFA,
is a member at The Welch Group and the chief investment officer and is one the brightest
tax, market analyst, and financial planning experts I know. Michael Wagner, CPA, CFP,
and Kimberly Reynolds, MS, CFP, are members at The Welch Group and are among the
most all around talented advisers in the field of financial planning. They each provided
technical assistance with this book. Senior Financial Advisers Foster Hyde, MS, CFP and
Beth Moody, MS, CFP are rising stars at our firm and not only help prepare, but also help
run our client meetings. They are assisted by a highly talented group of young advisers,
including Maggie Elliott, MS, CFP, Adviser; Matt Savela, CPA, Adviser; and Brett Norris,
CFP, Associate Adviser.
Our Welch Investments Division of The Welch Group, LLC is run by two members,
Woodard Peay, CFP, MBA, and Marshall Clay, Esq., CFP. Woodard is a seasoned
professional in financial planning who also knows what it takes to run a successful
business. Marshall graduated from West Point Academy, served our country as a
commissioned officer for seven years, then graduated from Cumberland Law School
before joining us. Rounding out their team is Callie Jowers, CFP, Adviser; and Reagan
White, Associate Adviser. Callie graduated magna cum laude in Family Financial Planning
& Counseling from the University of Alabama. Reagan also attended the University of
Alabama, where he graduated with a Bachelor of Science degree in finance.
Our adviser team is supported by an incredible administrative team that includes Roxie
Jones, Ramona Boehm, Wendy Weber, Jeff Davenport, Kelly DeRoy, Andrea Messick,
Lauren Wright, and Brent Gillis, CIC.
Writing a book revision and meeting promised deadlines is as time consuming as it is
intellectually stimulating, and the price charged is often paid by family members. I offer a
special thanks to my wife, Kathie, for her patience related to this and my many other
endeavors. I also have two wonderful sisters, Jean Watson and Babs Hart, who have
always been cheerleaders for all my endeavors.
Perhaps the single most influential person in my life has been my father, Stewart H.
Welch Jr., who passed away one week before his 99th birthday. He served as a living
testament of the true meaning of a life of service to others. He was truly a remarkable
person!


There is no way to express how grateful I am for the wonderful clients I have the pleasure
of serving. Each, in their own way, has contributed to my own learning and therefore to
this book.
Winston and I feel very fortunate to have the opportunity to work with the prestigious
publishing house of John Wiley & Sons, Inc., a traditional “blueblood” firm whose roots
can be traced back to 1807. We could not mention John Wiley & Sons, Inc., without
thanking “our Wiley teammate”: Executive Editor Sheck Cho.


Introduction
Much of the world we find ourselves in today is defined by chaos, complexity, and a
constant state of change. The IRS tax code and accompanying regulations currently runs
about 40,000 pages! And then there are our elected representatives in Congress who feel
it's their mandate to constantly change laws and regulations. The financial markets today
are complex and, in many ways, globally intertwined, making it impossible to predict how
events in one part of the world may affect markets in other parts of the world. It's no
wonder that so many people simply throw their hands up and focus on trying to pay their
bills rather than planning for long term events like estate, retirement, and tax planning.
I own a fee only investment management and financial advisory firm serving clients
throughout the United States. Winston Busby is a highly intelligent and resourceful
estate planning attorney with one of Alabama's largest and most prestigious law firms.
Together, our combined experience helping families plan their financial futures exceeds
50 years. We have had the opportunity to work with many affluent individuals and
families throughout the United States. The common characteristic that we find among
them is that they take pride in both their financial success and in their ability to handle
their finances. This book was not written just for the affluent but also for the many
people who want to become affluent.
What does it take? Although you may already have accumulated a sizable estate and feel
comfortable handling your investments, chances are there's a lot more you could do in
the area of estate, retirement, and tax planning. Tax laws change, creating new
opportunities and challenges regarding wealth accumulation and estate planning. The Tax
Cuts and Jobs Act of 2017 is the most significant tax legislation since the Reagan
Administration. This is the reason we wrote this book. The purpose of J.K. Lasser's New
Rules for Estate, Retirement, and Tax Planning, Sixth Edition, is to make certain that you
have taken steps to make sure your finances are in order and that you have a specific
strategy in place. Whether you are a wealthy Baby Boomer (or not so wealthy) or a
Millennial (or a generation in between) who just wants to know the basics of writing a
will, how much you should be saving for retirement, or how best to cut your income
taxes, this book offers valuable strategies you can use today and in the future.
As you read this book, we encourage you to keep your parents' situation in mind because
some of the more advanced strategies may be more appropriate for them than for
yourself. You may want to share the ideas in this book with them or, better yet, buy them
their own copy. After all, you should all share the goal of maximizing the amount of
money that you can transfer to your heirs and charitable organizations.
The book begins with an overview of the most important aspects of the Tax Cuts and Jobs
Act of 2017. You will be able to use this chapter as a reference tool for reviewing
significant estate and income tax laws affecting you.
Next, you will need to assess the adequacy of your current estate plan. What is the value
of your total estate? You will learn how to determine your estate net worth. This is vital


because knowing its value will let you define the resources available to your family to
provide for their income needs should you die pre maturely. You will also be able to
determine approximately how much in estate taxes your heirs might owe.
It is also important to assess whether you are on track toward retirement—are you
accumulating enough investment assets to provide you with a worry free retirement?
Studies indicate that the average working American is saving less than one third of what
he or she needs to have enough assets to maintain the same lifestyle during retirement.
In some cases, this shortfall will be made up from inheritances. If you find out that you're
lagging behind, this book will help you figure out how much you need to be investing to
get on track, and you'll learn how to devise an appropriate investment plan. Whether you
are a pre retiree (planning to retire within 10 years), already retired, or retirement is
decades away, we outline the very best strategies for you to use to create your best
retirement possible.
Another key aspect of estate planning is, of course, having a will. Research indicates that
as many as 80 percent of adult Americans either don't have a will or their will is out of
date. If you fall into this group, you should stop procrastinating. It really does matter if
you die without a will! We'll outline the perils of dying without one. The resulting chaos
will surprise you. You'll learn how to prepare yourself so that you can minimize the time
and expense of working with an attorney.
The use of trusts is a vital part of most estate plans. You can use them to protect your
children from themselves, to protect you from possible future creditors, or to save on
income and estate taxes. These are powerful weapons in the war to protect your assets for
yourself as well as future heirs. It is our experience that many people carry large amounts
of life insurance, including their employer's group life. Utilizing some type of trust is
often an invaluable estate planning tool. You'll learn about the irrevocable life insurance
trust, living trust, and other types of trusts. Be sure to read the section about the Legacy
Trust: a concept you can use to create a financial safety net for future generations of
family members (made famous by the Rockefellers and Kennedys).
Many of you face the difficult task of funding your children's education. You'll learn how
to effectively use qualified tuition plans and education individual retirement accounts as
well as custodial accounts and minors' trusts. You'll also learn about how grandparents
can be willing partners in assisting with your children's educational expenses.
If you are interested in providing financial support to a religious organization, an
educational institution, or a favorite charity, you'll gain insights on the best ways to
maximize the effectiveness of your donations. Often, gifts to tax exempt organizations
can solve a financial dilemma such as how to convert low basis non income producing
property into income producing property while avoiding a large tax bill.
Once you have accumulated enough assets for your retirement years, you may want to
shift your focus to transfer strategies for your children and other heirs. We'll outline
strategies that will allow you to transfer to heirs significant wealth at a fraction of its
market value while maintaining control of your property.


People who own a family business or farm often face a perilous future; this is especially
worrisome because many of these individuals desperately want to ensure that the
business or farm remains in the family so that it can be continued by future generations
of family members. Obstacles to this goal include estate taxes and lack of liquidity. The
solution is a well developed transition plan, which is also fully explained in this book.
In today's litigious society, many people fear the threat of a lawsuit that will result in
financial ruin. Feeling helpless, we may cross our fingers and hope it does not happen to
us. A preferable approach is to be proactive. If you consider yourself a likely target, you
can do many things to protect your assets. Some solutions are as simple as transferring
assets to a spouse who is less at risk. Other solutions include the use of trusts, family
limited partnerships, and even more exotic options such as domestic or foreign asset
protection trusts. For entrepreneurs, we extensively review the pros and cons of the
various entity choices you have for operating your business.
As you develop and implement your estate, retirement, and tax plan, you'll almost
certainly need the assistance of a qualified professional. Finding the right person,
someone who is truly qualified, can be a daunting task. It is one of the reasons many
people fail to plan at all. To help support you with this process, your coauthors will gladly
help you find an adviser to assist you with your needs (Appendix A). In Appendix A we
also offer tips on how to get the most out of your advisers while minimizing their fees.
Because the world around us is constantly changing and we want you to stay on top of
these changes, we maintain a Web link with updates of important changes related to the
content of this book as well as other topics we believe would be of concern to you. You
can access this resource by visiting the Resource Center at www.welchgroup.com; click on
“Links,” then “ESTATE BOOK UPDATES.”
As Americans, our limitations are constrained only by our own imagination, our
willingness to take time to develop appropriate strategies, and the self discipline to
execute our game plan. Picking up this book is an essential first step. Carefully reading it
and implementing the strategies most appropriate to your situation will enable you to
take a giant leap toward taking charge of your financial destiny. May God smile on your
journey.
Stewart H. Welch III, CFP®
Accredited Estate Planner


CHAPTER 1
Tax Cuts and Jobs Act of 2017
President Trump signed new tax legislation on December 19, 2017, that will significantly
impact many Americans. The title of the new law was intended to be the Tax Cuts and
Jobs Act. However, due to certain procedures involved in passing the new law, the short
title was removed and the official title is “To provide for reconciliation pursuant to title II
and V of the concurrent resolution on the budget for fiscal year 2018.” Despite the issues
surrounding the name, the new tax law is commonly known as the Tax Cuts and Jobs Act
and will be referred to in this book as the TCJA.
The TCJA sets forth the most extensive changes to the tax law in more than 30 years,
although many of the provisions are set to expire after 2025. The TCJA significantly
impacted both individual and corporate taxpayers. Individual tax rates were reduced, and
individual deductions were modified. Taxpayers operating businesses through flow
through entities, such as LLCs, S corporations, or sole proprietorships, received a
favorable new deduction for certain types of income. The TCJA reduced corporate tax
rates for corporations taxed as C corporations. In the estate and gift tax arena, the TCJA
doubled the amount of wealth that may pass tax free to nonspouse, noncharitable
beneficiaries.
Although the TCJA made changes to many areas of the tax law, not all the provisions of
the TCJA are permanent. Most provisions took effect on January 1, 2018. The TCJA
included a sunset provision stating that many provisions will expire after 2025. For
instance, the TCJA created provisions regarding individual tax reform that extend through
2025. However, the changes to business reform measures are generally permanent.
Taxpayers should become familiar with an overview of the TCJA and its effect on income
tax provisions, business tax provisions, and estate and gift tax provisions.

Ordinary Income Tax Rates
The TCJA effectively changed individual income tax rates from 2018 to 2025 for all
Americans other than those under the 10 percent tax bracket.
The TCJA shifted the marginal tax rates for Americans making more than $9,525. The
marginal tax rates for middle class Americans are subject to a progressive rate structure
as income increases. The ordinary income tax rates under the new law are: 10 percent, 12
percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. However, the
TCJA dramatically altered the income brackets to which the tax rates are applied. For
example, the marginal tax rate of 35 percent, which previously encompassed $424,950–
$426,700, now encompasses an income bracket of $200,000–$500,000. See Table 1.1 for
a complete review of the schedule for joint and single tax filers for 2018. The marginal
brackets are indexed for inflation and set to increase beginning in 2018.


TABLE 1.1 Schedule of Individual Income Tax Rates
Single Filers
2018 10%

12%

22%

24%

32%

35%

37%

Year $0–
$9,525

$9,256– $38,701– $82,501– $157,501– $200,001– $500,001+
$38,700 $82,500 $157,500 $200,000 $500,000
Joint Filers

2018 10%

12%

22%

24%

32%

35%

37%

Year $0–
$19,051– $77,401– $165,001– $315,001– $400,001– $600,001+
$19,050 $77,400 $165,000 $315,000 $400,000 $600,000

Capital Gains Tax Rates and Qualified Dividends
The TCJA maintained the favorable maximum capital gains rates of 15 percent for all
Americans making less than $425,000 ($479,000 for married filing jointly), indexed for
inflation. For wealthier Americans, the maximum capital gains rate will be 20 percent.
Similarly, the 15 percent rate on qualified dividends will apply to taxpayers making less
than $425,000 ($479,000 for married filing jointly), indexed for inflation. For taxpayers
with incomes above those thresholds, dividends will be taxed at 20 percent.

Educational Provisions
Prior law introduced many tax benefits for implementing an educational savings plan.
With respect to the TCJA, prior benefits were retained by extending the American
Opportunity Tax Credit for Higher Education Expenses through 2025 as well as the
addition of new benefits in some areas. Some of these benefits are highlighted below.

Education IRA
The TCJA continued the opportunity for taxpayers to contribute to a Coverdell Education
Savings Account. Because of some of the restrictions outlined below and the enhanced
features to 529 plans under the TCJA, most taxpayers will likely utilize the benefits of a
529 plan under the new law as opposed to Education Savings Accounts. Nonetheless, the
features of these accounts under the TCJA include:
Permanently increased the contribution limits from $500 per year to $2,000 per
year.
Distributions, when used to pay for qualified education expenses, are tax free.
Allowed tax free withdrawals for elementary (including kindergarten), secondary,
and postsecondary school tuition and expenses.
Included tuition, room and board, tutoring, uniforms, extended day program costs,


computer technology hardware and software, Internet access, and special needs
services for special needs beneficiaries as qualifying expenses.
The age limit is waived for special needs beneficiaries.
Contributions can be made until the donor's due date for their federal income tax
return.
For donors who are single tax filers with a modified adjusted gross income (MAGI) of
between $95,000 and $110,000 ($110,000 and $220,000 for married taxpayers filing
jointly), the contribution limits are (ratably) phased out. These MAGI thresholds are
adjusted annually for inflation.

Tip
If you would like to make a contribution to an education IRA for your
child but you do not qualify because your adjusted gross income (AGI) is
too high, consider having your child contribute to his or her own account.
Unlike other IRAs, a person does not have to have earned income to
contribute to an education IRA, nor is there a minimum age requirement.
Contributions cannot be made for beneficiaries who are 18 years of age or
older.

Section 529 Plans
529 college savings plans were expanded through broadening the meaning of “qualified
higher education expenses” to include tuition at public, private, or religious elementary or
secondary schools, limited to $10,000 per student during the taxable year.

Business and Corporate Tax Relief
Under prior law, the business taxpayer was allowed to immediately deduct up to
$500,000 of business property purchased during the calendar year. Prior law also allowed
for 50 percent bonus depreciation for purchases of certain new property. The TCJA
increased the deductible amount to $1 million with a phase out threshold of $2.5 million.
The TCJA expanded the bonus depreciation percentage from 50 percent to 100 percent for
purchases of property acquired and in service after September 27, 2017, and before 2023
(2024 for “long production period” property and certain aircraft). For the latest updates
regarding tax law changes, visit the Resource Center at www.welchgroup.com; click on
“Helpful Links,” then “ESTATE BOOK UPDATES.”

Corporate Tax Rate Changes
Under prior law, the tax liability for corporations taxed as C corporations was determined
by applying a certain set of progressive rates to brackets of taxable income. A rate of 35


percent as applied at the highest income levels ($18,333,333 in 2017).
Under the TCJA, the corporate tax regime is changed from a progressive rate structure to
a flat rate of 21 percent. You will notice that this rate is significantly lower than the
highest individual rate. However, corporations (again, taxed as C corporations) are still
subject to the so called double tax on income, meaning that income is first taxed at the
corporate level, now at 21 percent but if it is distributed to shareholders as a dividend, the
income is subject to a second level of tax at a top rate 20 percent.

Pass Through Income Deduction Under § 199A
One of the biggest changes to the tax law under the TCJA is the new 20 percent deduction
for business income derived from a pass through entity. Note, in the discussion of the
corporate tax above, we talked about the double tax. Income from a pass through entity is
subject to only one level of tax.
Under prior law, sole proprietorships, partnerships, LLCs, and S corporations were treated
as pass through entities subject to tax at the individual owner or shareholder level. The
income earned by the owners or shareholders was reported on their individual tax returns
and subject to ordinary income tax rates.
Under the TCJA, a 20 percent deduction is now available for taxpayers with domestic
“qualified business income” from these types of businesses for tax years after December
31, 2017, and before January 1, 2026. The provisions under new Section 199A are
extremely nuanced and complicated, but limits on the deduction are imposed on certain
types of income unless a taxpayer's income is below a threshold amount (taxable income
under $315,000 for joint filers, $157,500 for single filers).
The deduction is available to noncorporate taxpayers such as trusts and estates. However,
pass through income from certain service businesses in the fields of health, law,
accounting, performing arts, and other service businesses are not eligible for the
deduction. However, engineers and architects are not subject to this restriction.
Many other limitations and complications to the new pass through deduction exist, and
many tax advisers are looking to the IRS to guide them through issues raised by the
deduction.
Additionally, new regulations addressing the deduction were proposed on August 8, 2018.
Taxpayers may rely on these rules until final regulations are published.

Estate, Gift, and Generation Skipping Transfers
The TCJA retained the current transfer tax regime but made a significant change that
gives taxpayers a tremendous planning opportunity. The tax rate is 40 percent on estates
exceeding the exemption amount (i.e., the “taxable” estate). The previous exclusion
amount enacted was $5 million indexed for inflation and under prior law was set to be
$5,490,000 in 2018. Under the TCJA, the exemption amount doubled, meaning that each


individual may transfer up to $11,180,000 (indexed for inflation) at death or by gift
during life without paying transfer taxes. Because of portability, this effectively allowed
spouses to transfer approximately $22 million to beneficiaries without estate gift taxes.
The applicable exclusion amount is now the basic exclusion amount of $11,180,000
million (indexed for inflation) plus a deceased spouse's unused exclusion (DSUE)
amount.
Following is a list of select provisions that could affect your estate planning:
The TCJA maintained the maximum estate, gift, and generation skipping rates at 40
percent. The TCJA also temporarily increased the exclusion amount to $11.18 million,
indexed annually for inflation (see Table 1.2). This amount is set to return to pre
2018 levels at the end of 2025.
TABLE 1.2 2018 Tax Relief Act Applicable Exclusion Amount
Year Applicable Exclusion Amount Maximum Estate Tax Rate (%)
2018 $11,180,000

40

Portability is still a feature of the estate tax system under the TCJA. A decedent's
applicable exclusion amount is now the basic exclusion amount of $11.18 million
plus the DSUE amount. Congress intended that portability would simplify estate
planning. Portability will continue to be an important component of the tax system.
The TCJA retained the “annual exclusion” in which taxpayers may make gifts of
assets (assuming the gift is of a present interest) to as many donees as they like
without using their applicable exclusion amount. For spouses, the amount effectively
doubles. In 2018, the annual exclusion amount is $15,000.

Estate Planning Issues under the 2017 TCJA
Because of the unique opportunity provided by the TCJA, everyone should review their
estate plan to take advantage of the new provisions through 2025. An approach we favor
is for the client to contact one of their professional advisers on the estate planning team,
whether the estate planning lawyer, financial planner, life insurance agent, accountant, or
trust officer. Authorize that team member to assemble the team in a preliminary meeting
to review the listing of the assets and liabilities (financial X ray), review the current
documents, and then meet with the client and the client's spouse to make team
recommendations. This approach maximizes creative input and communication and often
aids in identifying important new alternatives to consider. The financial X ray would
show what assets are titled in the name of each spouse; what, if any, assets are titled in
joint names; and, ideally, what assets are in the children's names.
Understand that payment of estate or death taxes is largely elective. By making annual
gifts during your lifetime, then transferring the maximum tax free amount (applicable
exclusion amount) to your children and grandchildren at death, and finally bequeathing
your remaining estate to a family charitable foundation, your estate tax would be zero.


For example, Raymond and Laura Gold have a $50 million net worth. Each year, they
make maximum annual gifts to their two children and their spouses, plus maximum
annual gifts to 529 plans for each of their grandchildren. Their wills direct the maximum
to legacy trusts (Chapter 11) for the children, with the balance to a private foundation
(Chapter 12) where the children (and eventually grandchildren) will serve as trustees. If
they died in 2018, the disposition of their estate would look as follows:
$50,000,000 Total estate
–22,360,000 Exemption amount (2018) to legacy trust
$27,640,000 Directed to private foundation
$         0 Estate tax
So here's the question: Is $22,360,000 “enough” to leave to your children? If not, you can
still achieve “zero” estate taxes by employing additional strategies outlined throughout
this book.
Here are two areas to focus your attention on:
1. With the advent of portability, does the plan provide the most flexibility while
simultaneously taking advantage of the permanently enacted favorable transfer tax
provisions and achieving the best result from an income tax perspective?
2. As discussed later in this chapter, does the estate plan and overall tax plan adequately
prepare for income tax issues that may be a function of increased exclusion amounts
or the 3.8 percent tax on net investment income that began in 2013 under the
Affordable Care and Patient Protection Act?

Planning with Portability Under the TCJA
Portability allows the second spouse to die to use the DSUE amount from the first spouse
to die. For example, assuming a couple where the husband has $1 million of assets in his
name while the wife has $14 million in her name (combined estate of $15 million).
Assuming a $11.18 million exclusion amount, under prior law if the husband died with $1
million of assets titled in his name (and payable to wife), then $10.18 million of his
exclusion was wasted. This is because at her subsequent death, her now $15 million
estate would be eligible for only her $11.18 million exclusion amount. Thus her taxable
estate would be approximately $4 million. Portability will now allow the surviving wife to
use the $10.18 million DSUE amount of her deceased husband plus her own $11.18
million exclusion amount. Thus, she could transfer $22.38 million tax free at her death.

Dangers of Relying on Portability
The purpose of portability is to provide a level of simplicity to estate planning. For
couples with a combined net worth of less than the exclusion amount this may be true,
assuming the net worth does not grow faster than the inflation adjusted exclusion


amount. Couples with a combined estate of this size may rely on portability to minimize
or eliminate estate taxes. For high net worth couples, relying on portability for tax
planning is not the best option. Moreover, there are several tax and nontax advantages to
incorporating a plan that uses traditional credit shelter and marital trust planning to be
used in conjunction with portability. First, appreciation in the assets is protected from
estate taxes on the death of the second spouse to die. Second, the use of trusts will protect
the assets from potential creditors of the beneficiaries and safeguard the assets in the
event the surviving spouse remarries.
Despite the advantages of portability, solely relying on portability is a recipe for disaster.
The key to a solid estate plan is flexibility. Therefore, an ideal plan should build in the
flexibility to defer the decision of whether to rely on portability or traditional credit
shelter and marital trust planning until the death of the first spouse.

Planning Considerations Under the 2017 TCJA
With the opportunity provided by the TCJA, you have an opportunity to revisit your own
estate plan in light of a recently passed estate tax law that offers many opportunities for
business owners and wealthy families, as well as the “not yet wealthy.” Here's a quick
review of the major provisions of the law as well as several planning strategies worth
considering:
Up to $11.18 million (inflation adjusted annually) exempt from estate taxes.
Planning point: Many wills use a formula that states that the maximum amount
allowed under law first goes to fill up the family trust, with the balance going either
outright or in trust for the surviving spouse. With this higher limit, it means that in
many cases all of the assets will go to the family trust and none to the surviving
spouse, either outright or in the marital trust. For many families, this is an
unintended consequence. So, the best course of action is to review your current
planning documents to insure that even with the changes in the tax law that your
assets will be transferred in a fashion that you desire.
Portability of exemption amount. Planning point: Theoretically, the activity of
equalizing the estates between spouses is no longer necessary since the surviving
spouse now “inherits” the DSUE amount. However, if the surviving spouse remarries
and that new spouse dies, the exemption of the first deceased spouse would be lost
forever. Relying solely on portability is not an ideal strategy, and building a plan with
flexibility is the best course of action. When you review your estate documents,
determine the impact that portability will have on your plan in light of your personal
circumstances.
Make gifts during your lifetime. Planning point: If you are a small business owner
who would like to make certain the business stays in the family, now may be an
excellent time to gift some of your business ownership to children. And this is not
just for business owners. If you have an estate that significantly exceeds the
exemption amount, you may want to consider making tax free gifts to family


members, using assets that you believe will appreciate in value in the years ahead.
Heirs receive a new tax basis for transfers at death. (This is not new but is a point
worth making.) Planning point: You face a trade off in deciding whether to make
transfers during your lifetime versus transfers at death. The recipient of a gift during
your lifetime gets your same tax basis so that a future sale would be potentially
subject to capital gains taxes. With the exclusion amount now exceeding $11 million,
the income tax consequences of receiving a step up in basis may be a more important
factor than the transfer tax consequences.

The 3.8 Percent Tax on Net Investment Income
The 3.8 percent tax on net investment income (NII) was enacted as a new Section 1411 to
the Code in 2013. The purpose behind the tax was to tax “unearned” income, such as
dividends, rents, royalties, gain on the sale of capital assets, and income from businesses
in which the taxpayer did not “materially participate” to name a few.
The effect of the 3.8 percent surtax tax is that taxpayers in the highest income brackets
(37 percent for ordinary income and 20 percent for net capital gains) may be subject to an
additional 3.8 percent tax on income that meets the definition of NII.
Anytime that a client owns an interest in a business, there are numerous planning
considerations involved. If the business interest is held in trust, then there is an
additional layer of issues to work through to get the best result for the client.

NOTICE
As we are sure you are aware, Congress frequently changes tax law that
can significantly impact your estate, retirement, and tax planning. To stay
apprised of the latest changes that affect you, visit the Resource Center at
www.welchgroup.com; click on “Links,” then “ESTATE BOOK UPDATES.”
Posted content will focus on tax law changes that affect this book's
content as well as changes we believe are most important to our readers.
Although the NII tax is harsh, there are some planning opportunities to minimize the tax.
Individuals that own an interest in a trade or business should consult their tax
professionals to ensure that the requirements of active participation are satisfied.
Distributing NII from trusts will lower the amount of the NII tax imposed on trusts.
However, there may be nontax reasons to not distribute the income to a beneficiary—for
instance, to protect the distribution from creditors or provide incentive to the beneficiary.
If you feel your estate is not large enough to take advantage of any of these strategies, be
clear that, at a minimum, you need at least a basic estate plan, which would include a will,
durable power of attorney, and an advanced health care directive.


Limitations on Deductions
The TCJA made significant changes to income tax deductions for individual taxpayers.
The biggest changes involve an increase in the standard deduction and the suspension or
limitation on certain other deductions. As discussed below, the increase in the standard
deduction may cause a taxpayer who previously itemized to utilize the more beneficial
standard deduction. Taxpayers should consult their personal tax professionals to
determine what is best for their particular circumstances, but many will change to a
system in which they no longer deduct the interest on their mortgage or property taxes on
their home.

Changes to Standard Deduction
Under the TCJA, the standard deduction is increased from $13,000 to $24,000 for
married taxpayers that file a joint return. The TCJA also eliminates the personal
exemption. Because of the increase in the standard deduction and the elimination or
limitations imposed on other itemized deductions, many taxpayers who previously
itemized will now use the standard deduction and may only itemize once every several
years—for example if they have significant charitable contributions.

Mortgage Interest Deduction
The mortgage interest deduction—perhaps the most well known itemized deduction—has
been modified significantly by the TCJA. Under the TCJA, homeowners with mortgages
that existed before the enactment of the new law may continue to deduct interest on a
total of $1 million of debt for their first and second home. However, new buyers are
limited to deduct the interest on $750,000.
Additionally, deductions are suspended for home equity loans through 2025 unless the
loan is used to make substantial improvements to the home and the combined total of the
loan and the first mortgage does not exceed $750,000.
However, because of the substantially increased standard deduction, millions fewer
taxpayers will likely opt to take the standard deduction rather than using the mortgage
interest deduction.

Charitable Deductions
For tax years after 2017 and before 2026, the limitation on the deduction for cash
contributions made to public charities, private operating foundations, and private
distributing foundations is increased from 50 percent to 60 percent of AGI. The limitation
on deductions for cash contributions to private nonoperating foundations remains at 30
percent of the AGI.
For tax years beginning after 2017, the 80 percent deduction for contributions made for
university athletic seating rights is repealed. In other words, season ticket holders for


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