Considering and drafting documents for trusts should include tax planning. However, changes to the tax code passed by the U.S. Senate may place family-owned businesses at a disadvantage because trusts may be excluded from deductions and face higher tax rates.
Trusts are traditionally established to preserve a business for future generations or safeguard assets against taxes, a former spouse in a divorce or other claimants trying to seize part of them. Family-owned businesses often constitute pass-through companies such as partnerships, limited liability companies and S Corporations.
These entities may pay taxes through individual returns instead of corporations. While these entities are often major firms and chains, these often include grocery stores, makers of packaging, wholesalers and beer distributors. Some family-owned businesses claim that the Senate version of the tax bill removes these protections for their enterprises because trusts would be prevented from claiming deductions available to other pass-through enterprises.
Pass-through businesses, other than trusts, will qualify for a 23 percent deduction on their tax rates. Other qualifying pass-through enterprises would receive a top tax rate slightly below 30 percent when considering the new deduction. The highest tax rates for corporations would also fall to 20 percent under the separate bills passed by the Senate and the House.
The Senate bill also prevents trusts and enterprises that run these small or family businesses from taking advantage of lower tax rates. The consequences are particularly high for electing small business trusts that were legally-authorized in 1996. An ESB must pay taxes on earnings from these businesses as ordinary income even if it is subsequently reinvested. Currently, income is taxed at the top marginal rate of 39.6 percent which will drop to 38.5 percent under the Senate bill.
This unequal tax treatment for trusts will place them at a business disadvantage although this provision of the tax bill was intended to save billions from the national debt. One tax expert claimed that over half of all partnerships and corporations would be impacted if they are excluded from receiving the deductions that would be available to other pass-through businesses.
An attorney can help draft trust documents that protect an estate and are designed to address tax laws. A lawyer can help assure that these documents are legally-valid.
Source: Fox Business, “Family businesses worry the tax overhaul will hurt them,” By Dow Jones Newswires, Dec. 7, 2017