Shearman And Sterling

Internal Revenue Service Building, US

December 23, 2017

Tax Reform Summary for Family Offices


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On December 20, 2017, Congress passed the “Tax Cut and Jobs Act,” which was signed into law by President Trump on December 22, 2017. With some exceptions, the law’s provisions generally are effective for tax years beginning on or after January 1, 2018, and most of the provisions directly affecting non-corporate taxpayers will expire on December 31, 2025. The Tax Cuts and Jobs Act contains several provisions that may have a significant impact on the operations of family offices, including their investment vehicles.

Many family offices, including their investment vehicles, consist of entities that are classified as partnerships for U.S. federal income tax purposes. Partnerships are not subject to entity-level U.S. federal income taxes and, instead, income and gain and other items flow through to family members, trusts or other vehicles that own interests in the family office.

The following provisions of the Tax Cuts and Jobs Act may be relevant to your family office:

Maximum Non-Corporate Tax Rate

The new law reduces the maximum U.S. federal income tax rates for non-corporate taxpayers from 39.6 percent to 37 percent. Long-term capital gains and qualified dividends remain eligible for the maximum 20 percent rate. In addition, the Medicare tax on net investment income (3.8 percent rate) remains unchanged.

Alternative Minimum Tax (AMT)

The individual AMT is retained but with several adjustments. The AMT exemption amount is increased to $109,400 for married taxpayers filing jointly ($73,000 for unmarried taxpayers) and the phase-out thresholds are increased to $1 million for married taxpayers filing jointly ($500,000 for other taxpayers).

Pass-Through Income

The new law provides for reduced taxation on qualified business income (QBI) derived from certain businesses not held through a taxable corporation such as businesses held through partnerships and S corporations. Subject to certain limitations, a deduction equal to 20 percent is available with respect to any QBI reported by an individual, trust or estate, which results in a maximum effective U.S. federal income tax rate of 29.6 percent for such QBI (based on the new maximum non-corporate U.S. federal income tax rate of 37%). Except in the case of individuals that have total taxable income below certain thresholds, income from “specified service businesses” (which include skilled professions and any business that involves investing and investment management, trading, or dealing in securities, partnership interests, or commodities) is not considered QBI and thus is ineligible for the deduction. The deduction for each qualified business is limited to the owner’s allocable share of the greater of (i) 50 percent of the “W-2 wages” paid with respect to the qualified business, or (ii) the sum of 25 percent of the W-2 wages plus 2.5 percent of the unadjusted basis of all qualified property (tangible depreciable property) used in the qualified business determined immediately after its acquisition. REIT ordinary dividends and qualified publicly traded partnership income (e.g., oil and gas master limited partnerships) are also eligible for the 20 percent deduction, and such deduction is not subject to the wage limitation described above. QBI, however, does not include certain investment-related income, gains, loss and deductions.

Excess Business Losses

The new law contains a new limitation on the deductibility of losses from trades and businesses for taxpayers other than corporations. Under the new law, “excess business losses” of an individual, estate, or trust are not currently deductible. Excess business losses for a taxable year are defined as the excess of (1) all of the taxpayer’s deductions attributable to trades or businesses of the taxpayer, over (2) the sum of (A) the total gross income or gain of the taxpayer attributable to trades or businesses and (B) a threshold amount ($500,000 for married individuals filing jointly and $250,000 for other individuals). In the case of a partnership or S corporation, the excess business loss rules apply at the partner or shareholder level. Excess business losses are carried forward as part of the taxpayer’s net operating loss carryforward. Thus, business losses of a non-corporate taxpayer for a taxable year can offset no more than $500,000 (for married individuals filing jointly), or $250,000 (for other individuals), of non-business income of the taxpayer for that year. Excess business losses include losses that are not from passive business activities under the passive activity rules of section 469.

Deduction of State and Local Taxes

Deductions for state and local taxes are significantly curtailed by the new law. Individuals may continue to deduct without limitation state and local sales and property taxes that are paid or accrued in a trade or business. For state and local income taxes (regardless of whether business-related) and other sales and property taxes, individuals may only deduct up to $10,000 per year of a combination of (i) either income or sales taxes and (ii) property taxes.

No Deduction for Investment Expenses (Other than Interest)

Through the end of 2025, all miscellaneous itemized deductions, which were deductible under prior law to the extent they exceeded 2% of adjusted gross income, are no longer deductible by non-corporate taxpayers.

Estate and Gift Tax

Through December 31, 2025, the basic exclusion amount for estate, gift and generation-skipping transfer taxes has been doubled to $10 million, indexed for inflation (in 2018, this translates to a basic exclusion amount of $11.2 million for an individual and $22.4 million for a married couple). Beginning on January 1, 2026, the basic exclusion amount for estate, gift and generation-skipping transfer taxes will revert to the current amount (i.e., $5,000,000, indexed for inflation). The maximum estate and gift tax rate remains 40 percent. If an individual dies after 2025, the estate may owe additional estate tax on gifts that the individual made tax-free during the period when the basic exclusion amount was higher than on the date of the individual’s death. The annual exclusion for gifts in 2018 will be $15,000, and will be indexed for inflation in future years. The estates of nonresident noncitizen decedents will continue to be limited to the much lower $60,000 exemption on U.S. situs assets. Nonresident noncitizens also continue to be subject to gift tax on lifetime transfers of U.S. situs real and tangible personal property.

Carried Interest

Rules regarding so-called “carried interest” allocations of capital gain by partnerships have been adjusted. Under the new law, gains taken into account by an individual that arose from the disposition of (i) an asset held by an investment partnership, or (ii) an interest in an investment partnership, are short-term capital gains if the individual acquired or holds his or her partnership interest in connection with specified personal services provided to the partnership, unless the holding period for the asset or interest that was disposed of is more than three years (as opposed to the normal one-year rule).

Mortgage Interest Limitations

The limits on deductions for home mortgage interest have been tightened. Although qualified residence indebtedness incurred on or before December 15, 2017 is grandfathered (including certain subsequent refinancings), for new mortgages interest is deductible on no more than $750,000 of indebtedness. The $750,000 cap also applies to mortgages on second homes. Additionally, under the new law taxpayers cannot deduct interest on home equity indebtedness (and there is no grandfathering for existing home equity indebtedness).

Corporate/Business Tax Provisions

  • New Lower Corporate Tax Rate. The maximum corporate income tax rate will be reduced from 35 percent to 21 percent. The corporate AMT has been repealed.
  • New Limitation on Interest Deductibility. Net interest expense incurred by a corporate or non-corporate taxpayer with respect to a business is deductible only to the extent of 30 percent of the taxpayer’s “adjusted taxable income” with no grandfathering for existing debt but indefinite carryforwards of disallowed interest deductions. The 30-percent cap does not apply to qualifying small businesses that have average annual gross receipts of $25 million or less during the preceding three years. The 30-percent cap also does not apply to real property businesses (assuming they file an election that would have a modest impact on their depreciation schedule for structures) and does not apply to interest on debt not allocable to a business (such as debt incurred to finance passive investments rather than active business operations). Special rules apply to partnerships to prevent double counting and to allow partners to use the excess limitation of the partnership.
  • Immediate Expensing. The new law allows taxpayers to immediately expense 100 percent of the cost of certain tangible property that is purchased new or used and placed in service after September 27, 2017 and before January 1, 2023 (with an additional year for certain property with longer production periods).

International Corporate Provisions

  • Participation Exemption. The new law moves toward a modified territorial system in which U.S. corporations (but not individuals, domestic trusts or estates) pay no U.S. tax on dividends received from 10 percent (or greater) foreign subsidiaries (a “participation exemption”). But the new law also introduces a minimum tax that is imposed on 10 percent (or greater) U.S. shareholders in respect of intangible earnings of controlled foreign corporations and continues pass-through treatment for significant U.S. shareholders of passive income of controlled foreign corporations (the “CFC” regime). Moreover, the PFIC rules have been retained.
  • Tax on Accumulated Earnings. A one-time tax on the accumulated, untaxed earnings of foreign corporations as of Q4 2017 is imposed at the level of such corporations’ significant U.S. shareholders. Earnings held as cash and cash-equivalents are taxed at 15.5 percent, and all other earnings are taxed at 8 percent. The tax is imposed on all 10 percent (or greater) U.S. shareholders (including individuals, domestic trusts and estates) of foreign corporations that are either CFCs or have at least one 10 percent (or greater) U.S. corporate shareholder.

Potential Planning Opportunities

  • Consider holding certain assets in taxable corporate vehicles. Given the new 21 percent corporate tax rate, it could be more tax-efficient to hold assets that produce income other than long-term capital gains and QBI through a domestic corporation. Key considerations in evaluating potential corporate structures include: (i) state and local income tax impacts, (ii) the deductions that would be available to the corporation for investment expenses that are no longer deductible by individuals, (iii) whether the corporation could retain earnings without exposure to the accumulated earnings tax (AET), a 20 percent tax imposed on excess retained earnings, (iv) whether the corporation would be a personal holding company (PHC), which would be required to pay a 20 percent tax on the undistributed portion of its PHC income (i.e., certain types of ordinary income) but would not pay the AET, and (v) whether stock of the corporation would be held until the death of its shareholder(s), at which time the tax basis of the stock would be adjusted to its fair market value. Even if the earnings of the corporation are distributed currently to shareholders and thus subject to two levels of tax, the combined tax rate (including state and local) may potentially be lower than the rate the shareholders would have otherwise paid, subject to confirming the availability of tax-efficient exit strategies (such as a conversion to S-corporation status).
  • Explore holding rental real estate and certain other assets through REITs. In light of the new 20 percent deduction for QBI, which includes REIT ordinary dividends, it may become more efficient to hold assets that produce non-business income (such as, generally speaking, rents from a triple-net lease or interest) in a real estate investment trust (REIT). In such case, ordinary income that otherwise would be taxable at the new non-corporate 37 percent rate would be taxable at the QBI effective taxable rate of 29.6 percent. No more than 50 percent of the stock of a REIT can be held, directly or indirectly, by five or fewer individuals; closely related members of a family are aggregated and treated as one individual for this purpose.
  • Estate Planning. Individuals whose wills contain dispositive provisions based on the available basic exclusion amount should review their estate plans to ensure that the higher amounts (until 2025) are consistent with their wishes. Notwithstanding the potential retraction of the benefit of the higher basic exclusion, high net worth individuals will likely be better off utilizing the higher basic exclusion before 2026 in order to remove future appreciation from their taxable estates.

For additional information relating to the impact of the new law in your particular circumstances or any other tax or estate planning question or concern, please contact any of us mentioned below.

Authors and Contributors

C. Jones Perry, Jr.

Of Counsel

Private Client

+1 212 848 8854

+1 212 848 8854

New York

Derek Kershaw



+1 212 848 7964

+1 212 848 7964

New York

Sharon Trulock


Private Client

+1 212 848 8640

+1 212 848 8640

New York


Regional Experience