Tax Cuts & Jobs Act
TCJA (most of which went into effect on Jan 1, 2018) enacted some of the most sweeping reforms in over three decades (dating back to 1986) of USA’s federal tax policy. TCJA reinforces tax planning as a cornerstone of financial planning — especially for high-income taxpayers and high net-worth individuals. Tax policy overhauls made by TCJA impact every wealth management solution: from complex business restructuring to relatively simple insurance solutions.
Current discussions we are engaged in:
- with Business Owners
- If new TCJA provisions apply: How can such newfound resources from tax reductions be better deployed?
- If new TCJA provisions don’t apply: What can be done to qualify for a new rate drop? Should a business be restructured to qualify it for a lower tax rate?
- Should the previously preferred structure as an S-corporation (preferred since 1986) be abandoned?
- Is it better, going forward, for a business to be structured or re-structured as a lower tax rate C-corporation?
- How often should the Board be reviewing executive leadership?
- Should the Board be thinking about replacing the CEO, even when things are going well?
- Though research shows that CEOs who come from within tend to have a better chance if succeeding: What if there isn’t a deep enough bench of talent internally from which to draw?
- How should succession planning be approached in such cases?
- Is there a role for the founder who is ready to retire?
- Is this something the Board should consider?
- What about extra taxes that will be incurred by business owners if dividends are taken?
- How about possible double taxation if the business is sold?
- Should a business be bifurcated, so certain parts of it qualify for TCJA-allowed deductions?
- Should payroll or some other such non-qualified part (per TCJA) of a business be segregated out, so the new entity or division can benefit from more favorable tax status, without losing a qualified S-corporation election – especially if the new tax law gets changed again, or goes away as fast as it came – making such a go-forward plan easier to unwind later?
- Should a family business consider a splitting strategy, to better facilitate succession planning?
- Or should it segregate the business into divisions to lower unit valuations, and hence make it easier to transition ownership of piece parts?
- If a business does qualify for a new lower rate as a pass-through entity: how should the surplus be deployed?
- Deploy surplus funds into new or improved benefit and retirement plans (if sharing wealth is a goal)?
- Or, if a business has too many employees to materially improve its general benefits package: Should some sort of “top hat plan” be executed to provide selective benefits + incentives to key employees and those who add the most to a business’ success?
- Also, if personal non-cancellable own-occupation disability insurance surfaces as a need and want: Should a business pay for it corporately, so as not to add to employees’ compensation – especially now that TCJA deems such a benefit as taxable income upon receipt?
- How about succession issues?
- Does a succession plan even exist?
- Or is a succession plan so outdated that its implementation, going-forward (especially in cases of sudden unexpected death), could now be disastrous for either the decedent’s heirs or partners?
- How about stuff on a business’ wish list that new surplus funds from TCJA-allowed tax reductions can help make a reality?
- Upgrade manufacturing equipment and technology, to reduce waste or to scale more efficiently?
- Add to or upgrade a business’ next hires, to free up time for the business owner to personally enjoy?
- Or onboard a keyperson to help a business grow and prosper?
- Or establish-expand-improve a business’ Internet footprint?
- Or should a business leverage other tax reduction incentives TCJA allows when a business invests in qualified empowerment zones and derives qualified business income?
- Should mergers & acquisitions opportunities be opened up now because of surplus funds available from new TCJA-allowed tax cuts?
- Is this now a more opportune time for an older owner, who doesn’t have a viable succession plan, to entertain a sale?
- Is this a more opportune time to buy or merge with a competitor or complementary business?
- Is this a more opportune time to buy or merge with a competitor or complementary business?
- How much of a barrier is continuing high interest rates to such transactions?
- What are the TCJA-allowed opportunities and challenges for leveraged finance?
- For a U.S.-parent group with foreign subsidiaries?
- For a foreign-parent group with U.S, subsidiaries?
- Should surplus cash gleaned from a lower tax bill be used to buy-back shares or add to cash reserves or invest in securities?
- with Individuals
- Given the doubling of the unified federal estate, gift, and generational skipping (GST) taxes limit: Is this the right time to reconsider and restructure (if merited) previous wills, trusts, powers of attorney, medical directives, beneficiary designations?
- Should existing insurance policies be kept?
- Should large gifts be made to a dynastic trust?
- Should a life insurance policy be pre funded with a large gift now?
- What are the tax implications now of a prefunded policy becoming a Modified Endowed Contract (MEC)?
- Should income-producing assets now be given to a life insurance trust to fund insurance premiums?
- Should a large gift to a life insurance trust now be used to facilitate an exit from a spit-dollar plan?
- Should a large gift to a trust now be used to buy a policy from a retirement plan and remove it from the insured’s estate?
- Should an individual start a C-corporation with retained earnings to fund a split-dollar plan, key-person insurance, or buy-sell insurance?
- If an individual sold a policy in a life settlement transaction in the last three years apply for a tax refund based on the new basis rules for life settlements?
- Does the increased exemption amount present wealthy taxpayers additional opportunity to transfer highly appreciated assets to a close family member (or trust for such person) with a modest estate?
- Is substituting highly appreciated assets in grantor trusts in exchange for high-basis assets (e.g., cash) still a viable planning strategy – to achieve a step-up in basis without resulting in estate taxation?
- Given the repeal of personal exemptions and standard deduction: Is this the right time to implement plans which mitigate losses of previously allowed line-item deductions by leveraging increased exemptions for dependents and child tax credit?
- Given the new limit on State and Local tax (SALT) deduction (which is especially painful for high net-worth residents in high income and property tax states, e.g., CA, CT, MA, MD, NJ, NY, OR, VA): Is the right time to consider and make a qualified move (if merited) to a no- or low-SALT state?
- Is this the right time to consider and execute (if merited) options to mitigate losses from previously allowed line-item deductions by leveraging new increased limits which TCJA allows for qualified charitable giving?
- Given the reduction in mortgage interest deduction: Keep the debt, and invest excess cash? Or pay down the mortgage?
- Given the repeal of alimony deduction: Is this the right time to enter and grandfather alimony agreements before the 2019 deadline?
- Given the increases in Alternative Minimum Tax (AMT) exemptions: Is this the right time to leverage these, to avoid AMT which kicked-in because of previous lower thresholds under prior policy?
- Given the expanded uses for 529 Plan distributions: Is this the right time to leverage these now that TCJA allows use for qualified secondary school tuition, not just higher education expenses as was the case under prior policy?
- Is this the right time to consider converting to qualified income, e.g., W-2 employee moving to independent contractor status?
- Or vice-versa: Increasing W-2 wages or property associated with a business, e.g., independent contractor moving to W-2 employee status?
Yes, now is the time to comprehend the cornucopia of new and revised options available under TCJA guidelines — and to determine how to better restructure (if merited) solutions for high taxpayer business owners + high net-worth individuals + families + partners.
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