Tax reform creates opportunities for advisers

Numerous changes to individual and business tax provisions are likely to create at least short-term demand for advice

Jan 17, 2018 @ 12:04 pm

By Dominick L. Schirripa

Wealth planning professionals could come out winners in the tax reform game.

The new tax law doubles the estate and gift tax exemption amount, meaning fewer families will need extensive planning to avoid the tax. But that increased exemption sunsets after 2025, so the long-term outlook for transfer tax planning appears unchanged. In addition, numerous changes to individual and business tax provisions are likely to create at least short-term demand for advice.

The following provisions appear to be the ones that will most directly impact planners' clients (and therefore the planners themselves):

• Doubling of the estate, gift & generation-skipping transfer tax exemption.

• Reform of tax treatment of pass-through entity income.

• Changes to technical partnership terminations.

• Creation of Qualified Opportunity Zones.

• Changes to compensation and savings provisions.

Transfer tax exemptions

The law doubles the exemption amounts (as adjusted for inflation) from current law amounts of $5 million (as adjusted for inflation, $5.49 million in 2017) to $10 million for individuals. Our current projection is that new cost-of-living provisions will result in a 2018 exemption of approximately $11.18 million per individual. However, this increase will sunset in 2026, meaning the exemption will return to current law levels (with inflation adjustments through the interim period) absent further action by Congress. Treasury has been tasked with drafting regulations to prevent the reset of the exemption in 2026 from resulting in a virtual "claw back" of the increase.

The temporary exemption increase will likely increase the demand for planning services as clients adjust their plans within the new parameters of the law to achieve desired objectives. That demand could spike again in 2026 if plans need to be revised again.

Reform of taxation of pass-through business income

The law provides significant tax relief for business income earned through pass-through entities by allowing a 20% deduction for taxpayers with qualified business income (generally, domestic business income derived from an active business enterprise). Higher income taxpayers (those with wages exceeding $157,500 ($315,000 for joint filers)) are subject to certain limitations and phase-ins.

Although not resulting in parity with the corporate rate, the reforms create clear opportunities for wealth and financial planners with clients using pass-through structures, including many family and closely held businesses.

Changes to partnership terminations

The law repeals the technical partnership termination rule. Sale of 50% or more of the interests in a partnership no longer results in a termination requiring new elections. In fact, new elections are not permitted. This may hurt clients and plans that factored in an ability to reset elections upon a client's death or a transfer of interests to the next generation.

Qualified Opportunity Zones

Low-income community census tracts have been designated as "Qualified Opportunity Zones." Investment in such zones comes with significant advantages — capital gains reinvested in the zones through qualified opportunity funds (partnerships or corporations investing in the zones) enjoy deferred recognition in income and gains on the sale of a fund interest are "permanently" excluded. Though both income exclusions sunset at the end of 2026 (absent extension), such advantageous terms should make investments in these vehicles extremely attractive for high-income individuals.

Reforms to retirement, savings, and compensation provisions

Commissions and performance-based compensation in excess of $1 million will no longer be exempt from the $1 million deduction limit for employee compensation. Although compensation under binding contracts in effect on Nov. 2, 2017, is not subject to the new provision, compensation structures for executives may be altered in future contracts, requiring adjustments to clients' current plans.

In addition, the law limits the benefits of qualified equity grants for nonpublic companies. Income deferral elections will only be permitted where grants are connected to the performance of services and at least 80% of the company's employees receive grants. Further, the four highest compensated employees and any 1% owner of the company (or any person who was one of those at any time in the preceding 10 years) is ineligible for deferral.

These changes seem likely to narrow the range of options available to clients' to defer recognition of income. That could mean clients feel less impulse to seek elaborate planning, or just the opposite — some clients may be seeking advice to find new avenues to reduce their current tax bills.

Dominick L. Schirripa is managing editor for Estates, Gifts & Trusts at Bloomberg Tax. He can be reached at dschirripa@bloombergtax.com.


What do you think?

View comments

Recommended for you

Upcoming Event

Oct 09


Diversity & Inclusion Awards

Attend the industry’s first event celebrating diversity and inclusion as well as recognizing those who are leading the financial services profession in this important endeavor. Join InvestmentNews, as we strive to raise awareness, educate... Learn more

Featured video


How interest rates have affected different types of insurance

Social media and engagement editor Scott Kleinberg and reporter Greg Iacurci discuss a common theme in this week's popular insurance stories.

Latest news & opinion

Private Ocean grows to $2.2 billion with acquisition of Mosaic Financial

Combined financial planning operation gives the firm an expanded footprint in the San Francisco area.

Joe Duran has a game plan, and anyone can play

The CEO of United Capital built a formula for holistic financial planning that any firm can tap into — for a price.

LPL video about private equity looks like a swipe at Cetera

Recruiting video warns about potential consequences for advisers when a PE firm buys a broker-dealer.

Ladenburg chairman Phillip Frost steps down

The SEC charged Frost with fraud earlier this month.

Envestnet Tamarac partners with Schwab, TD on digital account openings

Auto-filling documents designed to make onboarding more efficient for RIAs and more convenient for clients.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print