Dear Friends and Colleagues:
Happy Holidays and Happy New Year! We hope 2016 has been a good year for you. We are writing to you once again with updates on 2017 tax laws and additional estate planning news.
Update on 2017 Tax Laws
As of now, the gift, estate, and generation-skipping transfer (GST) tax laws are slated to remain largely unchanged in 2017.
- Federal – The top Federal gift and estate tax rate will remain 40% and the Federal exemption will increase to $5.49 million per individual (and $10.98 million for a married couple). The increase in the Federal exemption from $5.45 million in 2016 is due to inflation only. The Federal gift tax annual exclusion will remain $14,000 per donee for individuals (and $28,000 per donee for married couples). Portability will continue so that a surviving spouse will be able to use his or her predeceased spouse’s unused exemption provided he or she filed a Federal estate tax return at the first spouse’s death.
- Massachusetts – The top Massachusetts estate tax rate will remain 16% with a Massachusetts exemption of $1 million per individual (and $2 million per married couple). Massachusetts has not yet adopted portability of the Massachusetts estate tax exemption.
The Trump Election and Estate Taxes
Although no changes in tax law are planned for 2017, it is important not to ignore the elephant in the room. The election of Donald Trump may mean substantial changes to Federal estate tax law. During his campaign, Trump promised a total repeal of the Federal estate tax. Although total repeal is not certain, substantial changes to the Federal estate tax law are likely coming in 2017 or 2018.
At this time we advise you not to make changes to your estate plan in response to the Trump election. Your existing estate plan is not now obsolete, and may not become obsolete. There are several reasons it does not make sense to make changes yet.
First, we simply do not know how and when the Federal estate tax law will be repealed. There are too many unknown factors. The Trump administration may have other priorities and may choose to attend to those first. Repeal might be temporary or may be sunsetted and thus the estate tax reinstated in the future. The Federal estate tax may be replaced with a new tax regime that includes a capital gains tax at death or carryover basis, both of which will require tax planning. A new Federal tax law may also impact gift and generation-skipping tax law, which are important elements of your estate planning. Many believe that the gift tax is unlikely to be repealed.
Second, Massachusetts will likely still have an estate tax. Planning to minimize or reduce Massachusetts estate taxes will remain important.
Third, your estate plan is designed to do more than just estate tax planning. It implements your wishes for your family. It provides for your spouse, children, and other beneficiaries in the best way possible. It protects assets for your family. And it may reduce income taxes. These aspects of estate planning will remain crucial elements of your estate plan, even if the Federal estate tax is repealed.
Some of you may have considered planning in light of the proposed changes to the Section 2704 regulations, which may limit discounts of gifts of family entities. It is now unlikely that these proposed regulations will be made final. The possibility still remains, but we do not believe last minute planning is advisable.
Please keep in mind that there are other elements of Trump’s proposed tax plan that, if enacted, may impact you. He has proposed reducing individual and corporate income tax rates. In addition, he has promised repeal of the 3.8% net investment income tax (the Medicare surtax).
Massachusetts will now allow income tax deduction for 529 contributions
Section 529 plans are a great way to make gifts to children and grandchildren in a tax-advantaged manner. In 2017, there will be yet another reason to make 529 contributions. Massachusetts residents will now be eligible for a state income tax deduction for 529 contributions to Massachusetts’ 529 plan (MEFA’s U.Fund) of up to $1,000 per individual and $2,000 per married couple. This change was part of a state law signed by Governor Baker in August 2016 that becomes effective in January.
Even taxpayers who are currently or will soon be paying for higher education may benefit from this change. 529 contributions made in 2017 can be withdrawn in 2017 or 2018 to pay for that year’s or next year’s tuition. Although these contributions will not have much time to grow tax-free, the taxpayer will be able to take the income tax deduction for the contribution on his or her 2017 income tax return. This may be a worthwhile tax savings strategy, even if college is right around the corner.
We wish you a happy and healthy 2017!
Dale Ann Kaiser Rachel Ziegler
The information provided in this newsletter is offered for informational purposes only; it does not constitute specific client legal advice or an offering to create an attorney-client relationship. This newsletter may be considered advertising under the Massachusetts Rules of Professional Conduct.