2017 Year-End and 2018 Planning

December 21, 2017

As the year draws to a close, much is expected to change with respect to income, estate and gift taxes as a result of tax reform. Estate planning remains important, as the provisions of the Congressional bill informally known as the “Tax Cuts and Jobs Act,” approved by the House and the Senate and sent to the President for signature on December 20, 2017 (the Tax Bill), offer multiple planning opportunities; and non-tax reasons for estate planning, such as asset protection and succession planning, continue to exist. In addition, federal estate tax legislation historically has been subject to change; therefore, it is important that estate plans be flexible enough to weather future tax modifications.

In this memorandum, we offer you some general advice regarding year-end planning, and briefly describe the Tax Bill’s provisions relating primarily to gift, estate and generation-skipping transfer taxes, and individual income tax.

2017 Year-End Planning Advice

State and Local Tax Prepayment

Under the Tax Bill, deductions for state and local income taxes (SALT) will be limited. As a result, you should consider paying the balance of your 2017 state and local income taxes by December 31, 2017. Bear in mind that taxpayers will not be permitted to deduct 2018 SALT payments prepaid in 2017, but 2018 property taxes may be deductible if paid in 2017 (although the ability to prepay property taxes is not universally available – check with your local property tax assessor and your accountant).

Annual Exclusion Gifts

In 2017, the annual exclusion amount is $14,000 per donee, and a married couple may gift $28,000 per donee. The annual exclusion amount increases in 2018 to $15,000 per donee, and a married couple may gift $30,000 per donee. The limitation on gifts to noncitizen spouses increases from $149,000 in 2017 to $152,000 in 2018.

Gifts in cash may be made up until 11:59 p.m. on December 31 and will still count as 2017 gifts. Gifts to non-charitable beneficiaries by check must be cashed by the donee before January 1, 2018.

Please remember that contributions to 529 college savings plans and transfers to insurance trusts and other inter vivos trusts that are subject to “Crummey” powers of withdrawal count toward a donor’s total gifts to the donee for that year. For example, if a single donor contributes $3,000 to a 529 plan for a child in 2017, the maximum remaining amount the donor may gift that child for 2017 will be $11,000. Gifts in excess of that amount will constitute taxable gifts and will reduce the donor’s lifetime exemption amount.

Direct payments for tuition, medical expenses and health insurance premiums in respect of a donee do not count toward the annual exclusion amount for that donee and do not reduce the donor’s lifetime exclusion amount.

Trustees of insurance trusts and other inter vivos trusts should make sure that Crummey notices are up to date. If a trust includes a Crummey power or withdrawal right, the Trustee should send notices to the Crummey power holders in a timely fashion. The Trustee should keep the Crummey notices with the trust records.

If you plan on making any year end gifts in excess of your annual exclusion amount, please contact us so that we may discuss these considerations in more detail, especially in light of the impact of the Tax Bill on taxable gifts.

Distributions from Retirement Accounts

If you are in pay status, you must take your minimum required distribution (MRD) before year end. You should check with the custodian to determine whether you must take a distribution before year end.

Periodic Document Review

Given the changes to the estate tax laws in the Tax Bill, it is important to review your estate planning documents. You should also review your documents periodically following changes in your personal circumstances, such as a change in marital status, the birth of a child, a change in the value of your assets or a change of domicile.

Wills and trust arrangements that contain a “formula bequest” tied to the maximum amount sheltered from federal estate tax may need to be reviewed in light of differences between the federal estate tax exemption and your state’s estate tax exemption. The doubling of the federal estate tax exemption under the Tax Bill may necessitate review of your will and trust arrangements if your assets are distributed according to tax formulas. For example, with the doubling of the estate tax exemption, a funding formula that bequeaths the maximum amount possible without incurring estate tax to a credit shelter trust or other third-party beneficiaries may result in significantly more of the estate, or even the entirety thereof, passing to the credit shelter trust or such beneficiaries and not to or for the benefit of the surviving spouse.

Life Insurance

If you have not already done so, consider whether it makes sense for your life insurance to be owned by an irrevocable life insurance trust. Such a trust could result in the death benefit of your life insurance escaping estate tax inclusion at your death.

Successor Owners of 529 Accounts

You should consider naming a successor owner for any 529 college savings accounts that you have created.

Successor Custodians

It is also important to name a successor custodian of Uniform Transfers to Minors Act and Uniform Gifts to Minors Act accounts. Remember that if you are the donor to a UTMA or UGMA account, you should not be the custodian. (If you are the donor and the custodian of your child’s UTMA account, the account will be includible in your taxable estate if you should die prior to the child’s attainment of the age of majority.)


Tax Rates

Taxable income of individuals currently is subject to seven tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The Tax Bill adjusts the seven tax brackets slightly: 10%, 12%, 22%, 24%, 32%, 35% and 37%, with the top rate applying to income over $600,000 for married couples and $500,000 for individuals.

Standard Deductions

The standard deduction will increase to $12,000 for individuals and $24,000 for married couples filing jointly.

Personal Exemptions

Personal exemptions will disappear.

Kiddie Tax

The tax on unearned income of minors, known as the “kiddie tax” has been simplified. Instead of applying the tax rates of the minor’s parents to the minor’s unearned income, the kiddie tax will now tax net unearned income of a minor at the rate applicable to trusts and estates (i.e., 4 rate brackets, starting at 10% and increasing to 37% for income over $12,500).

Capital Gains

Capital gains rates and holding periods will remain unchanged, except with respect to carried interest, which will require a 3-year holding period to be classified as long term capital gains.

Mortgage Interest Deduction

Currently, if you itemize your deductions, you can deduct qualifying mortgage interest for purchases of up to $1,000,000 plus an additional $100,000 for equity debt. The $1,000,000 cap applies to a mortgage on your primary residence plus one other home.

Under the Tax Bill, deductions for current mortgages will be grandfathered, but deductions for qualifying mortgage interest on mortgages incurred after December 15, 2017 will be capped at $750,000. The deduction for interest on home equity debt will be eliminated.

Medicare Surtax

The threshold for the imposition of the 3.8% Medicare surtax on investment income and 0.9% Medicare surtax on earned income will remain the same in 2018 for individual taxpayers: $200,000 for single filing taxpayers, $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately and $12,500 for trusts and estates. A complex non-grantor trust may avoid some or all of the Medicare surtax by distributing such income directly to a beneficiary whose income is below the net investment income threshold.

State and Local Income Tax, Property Tax and Sales Tax Deduction

Under the Tax Bill, taxpayers will be permitted to deduct up to $10,000 in state and local income taxes, property taxes or sales tax.

Exclusions of Gain from Sale of Your Home

Under current law, you can exclude up to $250,000 ($500,000 for married taxpayers) in capital gains from the sale of your home so long as you have owned and resided in the house for at least two of the last five years. These provisions were not modified in the Tax Bill.


The AMT will be maintained, but the Tax Bill reduces the number of filers who would be affected by raising the income levels to $70,300 for single taxpayers and $109,400 for married taxpayers, and the phase-out thresholds will be increased to $1,000,000 for married taxpayers filing a joint return, and $500,000 for all other taxpayers.

Miscellaneous Itemized Deductions

Most miscellaneous itemized deductions, including notably the deduction for the payment of management fees to investment managers, will be eliminated.

Contributions to Retirement Plans

The IRA contribution limit for 2018 remains unchanged at $5,500. Individuals over age 50 may also make a “catch up” contribution of $1,000. Contributions to an IRA prior to April 15, 2018 can count as a 2017 contribution.

The maximum amount that may be contributed to a 401(K) during 2017 is $18,000, increasing to $18,500 in 2018. Individuals over age 50 may make a “catch up” contribution of $6,000 in 2017 or 2018.

Reporting Foreign Gifts

If the value of the aggregate “foreign gifts” received by a U.S. individual (other than an exempt Code Sec. 501(c) organization) exceeds a threshold amount, the U.S. individual must report each “foreign gift” to the IRS. Different reporting thresholds apply for gifts received for (a) nonresident alien individuals or foreign estates, and (b) foreign partnerships or foreign corporations. For gifts from a nonresident alien individual or foreign estate, reporting is required only if the aggregate amount of gifts from that individual exceeds $100,000 during the tax year. For gifts from foreign corporations and foreign partnerships, the reporting threshold amount will increase to $16,111 in 2018. Distributions from a foreign trust to a U.S. individual beneficiary in any amount must be reported.


For 2018, an individual with “average annual net income tax” of more than $165,000 for the first five tax years ending before the date of the loss of U.S. citizenship will be considered a covered expatriate. Under a mark-to-market deemed sale rule, all property of a covered expatriate is treated as sold on the day before the expatriation date for its fair market value. However, for 2018, the amount that would otherwise be includible in the gross income of any individual under these mark-to-market rules will be reduced by $713,000 (up from $699,000 for 2017).

Estate, Gift and Generation-Skipping Transfer Taxes

The Tax Bill doubles the gift, estate and generation-skipping transfer tax exemption from $5,600,000 (for 2018 under current law) to $11,200,000 per individual (or $22,400,000 for married couples). The gift, estate and generation-skipping transfer taxes will not be repealed under the Tax Bill. Portability of a deceased spouse’s unused estate tax exemption (but not generation-skipping transfer tax exemption) to the surviving spouse remains viable under the Tax Bill.

State Estate and Gift Taxes

New York’s exemption from estate tax is currently $5,250,000 and will equal whatever the federal exemption in 2019 would have been pursuant to the laws in effect on January 1, 2014 (meaning the New York exemption will not double as a result of the Tax Bill). However, estates worth more than 105% of the New York exemption are subject to tax on the entire estate, without any benefit from the exemption. New York has no gift tax, but does include gifts made within 3 years of death in the estates of New York resident decedents. New York does not provide for portability of a deceased spouse’s unused estate tax exemption.

New Jersey’s estate tax applies to estates in excess of $2,000,000 for decedents dying during 2017, with a top rate of 16%. However, the New Jersey estate tax is repealed for decedents dying on or after January 1, 2018. New Jersey does not have a gift tax, but it does impose an inheritance tax on transfers to collateral relatives or non-relatives. This inheritance tax will continue after the estate tax is repealed.

In 2017, Connecticut’s estate and gift taxes apply to estates and aggregate gifts in excess of $2,000,000, with a top rate of 12%. The exemption will rise to $2,600,000 in 2018, and then to $3,600,000 in 2019, with the exemption ultimately matching the federal exemption in 2020. Unlike New York, the Connecticut exemption after 2019 will be calculated using the federal exemptions in effect at the death of the decedent or at the time of the gift, so under its current laws, the Connecticut exemptions will jump substantially in 2020. Connecticut does not provide for portability of a deceased spouse’s unused estate tax exemption.

For additional information on recent tax developments with respect to private wealth planning, please contact one of the attorneys listed below.