Tax Reform Friday: For Tax Savings, Trust in Estate Planning?


While much of the tax community was responding to the game-changing decision in South Dakota v. Wayfair yesterday, tax reform continues to be a pressing concern for practitioners and their clients. So what’s kicking in the world of tax reform? Bloomberg’s Lynnley Browning recently covered a unique response to Pub. L. No. 115-97: creating LLCs and non-grantor trusts.

As Browning reports, this scheme is meant to mitigate the impact of the $10,000 SALT deduction cap on federal income tax liabilities. The process involves creating an LLC in a “no-tax” state and transferring “fractions of that LLC” to several non-grantor trusts, which can deduct up to the $10,000 limit. These tactics are limited, however, she warns, as some state laws aren’t compatible with these trusts; as an example, Florida’s homestead exemptions prevent using this strategy.

Other tax “workarounds” that states have created to reduce the liabilities of taxpayers who will owe more because of the deduction cap have been met with the IRS’s scrutiny. In the wake of California proposing deductions in return for taxpayers’ donations to charity and New York’s Employer Compensation Expense Program, IRS Notice 2018-54 remarks that “taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.”

Will the IRS similarly throw shade on this estate planning arrangement? Browning notes that other existing IRS guidance warns that non-grantor trusts like these could be deemed just one entity, i.e., entitled to only one deduction, though “the measure has never been bolstered by regulations, leaving it vague.”

One thing is for certain: as long as people seek to reduce their tax liabilities, practitioners will use their creativity to deliver.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Does your state’s legal code permit using non-grantor trusts to get more mileage out of the $10,000 SALT deduction cap?

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Law’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.

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