Many of you have heard that the Tax Cuts & Jobs Act of 2017 that was signed into law just before year-end slashes the state and local tax deduction to $10,000. Many homeowners will pay far more in property taxes than they will be able to deduct on their federal income tax return. This includes many in Florida who own residences both here and somewhere else.
Is there anything that you can do? Actually, there is. I recently returned from the Heckerling Estate Planning Conference that is hosted by the University of Miami Law School. It’s a week-long conference that’s similar to attending one year of law school in about 40 hours. Top estate planning professionals from around the country attend this annually, picking up high-level continuing education credits. This was my 25th consecutive year of attendance.
Two well-known national experts on these subjects, Jonathan Blattmachr and Marty Shenkman, discussed the use of irrevocable trusts coupled with the use of LLCs to achieve the income tax deduction. While the strategy isn’t for everyone, the theory goes that by contributing residences to an LLC that generates income (either from the rental of the property or from the contribution of other income-producing assets) and by having the LLC owned by a certain type of irrevocable trust, the property tax deduction limitations won’t apply.
The trusts must be drafted in such a way as to achieve the intended result, and every family will have different objectives and goals. Consequently, there isn’t a “cookie cutter” form that will get the job done. Instead, this is a true advanced estate planning technique that actually saves money for the family during the grantor’s lifetime.
Pretty cool — at least to a trust attorney!
There’s always a rub, as you might imagine. A technique like this would likely invalidate Florida homestead status and thereby remove the Save Our Homes property tax cap ceiling. But it could certainly work for northern residences that don’t have the homestead requirements that Florida law imposes.
An additional consideration rests in whether this law will remain in place for any period of time. The new tax act was passed by a thin margin, with no support from any of the Democrats in Congress. What happens in the next election is anyone’s guess — and the high tax states like New York, Massachusetts and Minnesota are unlikely to want this law on the books for very long.
Beware — undoing the transaction won’t be so easy or without consequence. Because the federal estate and gift tax exemption rose to $11.2 million per person, however, making intra-family gifts back and forth might be possible, which could mitigate that problem.
The new tax law sunsets, by the way, on January 1, 2026. You might remember that when George W. Bush was in office he signed into law tax reform that repealed the federal estate tax in 2010. That happened to be the year that billionaire George Steinbrenner died. Coincidence? In any event, that law sunset in 2011 and the estate tax returned. It seems that as the political pendulum swings, so does the tax law.
The new law provides all sorts of planning opportunities. With the estate tax affecting fewer people, those with large unrealized gains will be looking to plan their trusts to achieve maximum step-up in tax cost basis, minimizing capital gains for loved ones who inherit appreciated assets. The funny thing is, that in order to accomplish this the strategies run counter to the planning that one usually embarked on to minimize the estate tax.
Creative use of family partnerships during lifetime could also result in lower tax bills for many wealthy families. I plan to write about these strategies in future columns.
Just as they warn in those crazy television shows where people jump off mountains wearing flying squirrel suits — don’t try these strategies at home! There’s much to consider and one should consult a highly qualified professional well versed in these matters before diving in.
As one of the speakers at the Heckerling conference said, “They’re going to have to close the loopholes in The Cuts & Jobs Act. Once good attorneys help clients figure all of this out, the $1.5 trillion price tag the Congressional Budget Office predicted will be just a drop in the bucket to what this really will end up costing the government.”