Impact of New US Tax Law on High Net Worth Individuals, Trusts and Family Offices

by Skadden, Arps, Slate, Meagher & Flom LLP

Skadden, Arps, Slate, Meagher & Flom LLP

The newly enacted U.S. tax law makes significant changes to provisions of the Internal Revenue Code affecting high net worth individuals, their investment entities and family offices. These changes are likely to spur gift planning, increase the use of trusts to reduce exposure to state income taxes, give rise to new compensation arrangements and other changes within family offices, and provoke questions about conversion to corporate form.

Gift Planning

The act doubles the amounts that a U.S. person can transfer free of the federal estate and gift tax and the generation-skipping transfer (GST) tax. In 2017, each individual had an estate and gift tax exemption and a GST exemption of $5.49 million. Beginning on January 1, 2018, these exemptions were increased to approximately $11.2 million, indexed for inflation in future years.

The act doubles the amounts that a U.S. person can transfer free of the federal estate and gift tax and the generation-skipping transfer tax.

The higher exemption amounts are scheduled to return to their lower pre-act levels after December 31, 2025. Accordingly, high net worth individuals should consider making gifts equal to their increased exemption amounts prior to this date. And because any appreciation in gifted assets should be protected from future wealth transfer taxes, a gift of property in 2018 may be a better use of an individual’s exemption than a gift in 2025.

The act does not change the federal income tax treatment of assets owned by a decedent at the time of his or her death. This means that unrealized appreciation in an asset held by an individual during his or her lifetime will never be subject to income tax if the individual holds the asset at the time of death. Conversely, assets that are given away during a donor’s lifetime generally will have a basis in the hands of the recipient equal to the basis of the donor. In structuring lifetime gifts to take advantage of the new increased exemption amounts, donors and their advisers should consider income tax consequences and potential planning opportunities in connection with a sale of assets by the gift recipient.

Individuals also should review their wills and revocable trust agreements in light of the changes in the new law. These documents frequently include dispositions that are based on estate and GST exemption amounts. In view of the changes to these exemption amounts, dispositions included in testamentary documents may not work as intended in some cases.

Individuals also should review their wills and revocable trust agreements in light of the changes in the new law.

Income Tax Planning in View of Changed Deductions

The act makes significant changes to the income tax laws affecting individuals and trusts. These changes also are set to expire on December 31, 2025, after which time pre-act law will apply.

The act modifies the income tax rates applicable to individuals and trusts, with the top income tax rate now 37 percent instead of 39.6 percent. However, the act eliminates or restricts a number of important income tax deductions, including one for state and local income taxes. The restriction of this deduction should increase focus on utilizing trusts that are not subject to state or local income tax.

The act also eliminates the ability to deduct certain miscellaneous itemized deductions. These include deductions for expenses incurred in the production of income, such as investment management expenses and tax preparation fees. Family offices may consider approaches that potentially enable these items to remain deductible either by causing them to be trade or business expenses, or by structuring some of the payments as a profits interest rather than as a fee.

While the act eliminates a number of income tax deductions, it adds a significant 20 percent deduction for individuals, trusts and estates that receive income from a “qualified trade or business” held in pass-through form, such as a partnership or an S corporation. There are, however, limitations on the ability of individuals and trusts with income in excess of certain thresholds to benefit from this deduction.

The act adds a significant 20 percent deduction for individuals, trusts and estates that receive income from a “qualified trade or business” held in pass-through form.

The new 20 percent deduction may generate planning opportunities for family offices and investment entities. As one example, families with holdings that are likely to qualify for the new deduction might consider compensating family office executives with a profits interest in a family investment partnership rather than W-2 wage income. The profits interest arrangement may enable executives to enjoy the lower tax rate resulting from the deduction while further aligning the interests of the family office and the executive.

Conversion to Corporation?

The act significantly reduces the corporate tax rate to 21 percent, down from a top rate of 35 percent. Unlike the provisions applicable to individuals, trusts and estates, this rate reduction does not expire on December 31, 2025. Rather, it is drafted to be permanent. (See “US Tax Reform Enacts the Most Comprehensive Changes in Three Decades.”) Moreover, corporations retain the ability to deduct state and local income taxes. These factors may prompt high net worth individuals to consider whether they should hold investment assets through corporations.

Certain factors may prompt high net worth individuals to consider whether they should hold investment assets through corporations.  

In many cases, this may not make sense due to factors including (1) the additional shareholder-level taxes that may be imposed on a removal of assets from the corporation (either as a dividend or on a redemption of corporate stock), (2) a tax on appreciation in the assets held by the corporation, which would not have been imposed if the same assets had been held by the shareholder at the time of his or her death, and (3) the potential application of taxes such as the personal holding company tax and accumulated earnings tax, which may apply to the undistributed earnings of certain corporations that do not conduct active businesses.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.