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What Did the Income Tax Cut Mean for Estates?

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Tax Cut

At Fleming & Curti, PLC, we frequently act as fiduciary. That means we handle money held in trusts, conservatorships and individual names. It also means we file tax returns — lots of them. We have just completed (mostly) the 2018 tax filings, and we have some insights into how the 2017 Tax Cut and Jobs Act has affected income taxes for real people — and trusts.

Your mileage may vary

Of course, the effect of the federal tax cut may be very different for different taxpayers. The sample we deal with is different from the average taxpayer. One key difference: we see a lot of young people with substantial personal injury settlements. That group, especially, was hit hard by the new tax law.

Still, the numbers are interesting. We filed about the same number of tax returns this year as in 2018 (that is, for 2017). We saw a wide spread in incomes — everything from negative numbers to over a half million dollars. Many, but not all, of the returns included large medical deductions.

So what are the numbers?

The average amount of tax paid in 2017 across all of our returns: a little over $28,000. For 2018, that number dropped to just under $17,000. In all, that meant about a 42% decrease in average tax liability.

In fairness, though, that was based on a slightly lower total income for the year. The total income was down about 20%. Why? Well, that’s actually another interesting question — and the answer is not really about investment experience or interest rates. More on that in a minute.

A better test of the effect of the Tax Cut and Jobs Act is probably to look at effective tax rates. For all of the returns we prepared, filed or reviewed in 2017, the average tax rate was just over 5%. In 2018, that number actually rose — to just a shade under 10%. That figure ignores those returns that paid no tax at all — a little less than half of all returns in each year.

But didn’t the Tax Cut and Jobs Act decrease taxes for most individuals? Yes, it did. But there’s one category that explains much of our office experience.

Introducing: the Kiddie Tax

Back in the dark ages (OK — thirty years ago), children paid tax on their income at their own tax rates. That presented an opportunity for wealthy families to reduce their taxes. All the parents would have to do would be to transfer income-producing assets to their minor children; they could still keep control in the family, and the kids’ tax rates would be lower, at least until they graduated from college and went to work in the family business.

In 1986, Congress tried to close what it saw as a loophole. Since it targeted high-income children, it immediately got nicknamed “the Kiddie Tax.”

Initially, the new tax applied only to children under age 17. The congressional solution was elegant: a minor child’s tax rate would be pegged at the higher of the child’s own rate or the parents’ rate. That way child stars (remember Webster and Punky Brewster?) could pay higher taxes on their investment earnings, while the children of millionaires could not capitalize on their relatively lower incomes.

In 2006, the coverage of the Kiddie Tax expanded to age 18. Two years later, it expanded again — youngsters would pay the higher tax until age 23 if they were full-time students.

One problem with the Kiddie Tax from its inception: in order to complete the child’s return, her tax preparer would need access to her parents’ returns. That made completion of tax returns for children challenging, at least.

Applying the Kiddie Tax to our cases

But most of the youngsters for whom Fleming & Curti, PLC, prepares or reviews returns are not wealthy because of on-screen charisma or lucky parent selection. Because they were seriously injured in an accident, or by medical malpractice, they received significant settlements. They also tend to have large — often even huge — medical and care costs. Those children often earn more than their parents, so getting those parental tax returns — though required — never made much difference.

Along comes the Tax Cut and Jobs Act of 2017. It offers to make calculating the Kiddie Tax easier. Rather than basing the tax level on the parent’s income, we can now just use one benchmark. Unfortunately, Congress chose the benchmark that results in the highest possible tax liability for children with income. The Kiddie Tax is no based on the tax level imposed on trusts and estates — and that maxes out at 37% after just $12,500 of taxable income.

To compound the issue, the Tax Cut and Jobs Act also stripped away a number of deductions that previously applied to conservatorship or trust accounts like those we usually manage. The result: the new tax rates hurt youngsters with serious injuries and income-producing assets awarded precisely to help them pay for their care needs.

So what happens to the Fleming & Curti, PLC, tax returns if we take out all those minor beneficiaries? The average tax rate plunges to below 2% in 2018 — about half of the average rate for 2017.

Should a tax cut result in tax increases for seriously injured children? We didn’t think so, but that’s how it looks.

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Robert B. Fleming


Robert Fleming is a Fellow of both the American College of Trust and Estate Counsel and the National Academy of Elder Law Attorneys. He has been certified as a Specialist in Estate and Trust Law by the State Bar of Arizona‘s Board of Legal Specialization, and he is also a Certified Elder Law Attorney by the National Elder Law Foundation. Robert has a long history of involvement in local, state and national organizations. He is most proud of his instrumental involvement in the Special Needs Alliance, the premier national organization for lawyers dealing with special needs trusts and planning.

Robert has two adult children, two young grandchildren and a wife of over fifty years. He is devoted to all of them. He is also very fond of Rosalind Franklin (his office companion corgi), and his homebound cat Muninn. He just likes people, their pets and their stories.

Elizabeth N.R. Friman


Elizabeth Noble Rollings Friman is a principal and licensed fiduciary at Fleming & Curti, PLC. Elizabeth enjoys estate planning and helping families navigate trust and probate administrations. She is passionate about the fiduciary work that she performs as a trustee, personal representative, guardian, and conservator. Elizabeth works with CPAs, financial professionals, case managers, and medical providers to tailor solutions to complex family challenges. Elizabeth is often called upon to serve as a neutral party so that families can avoid protracted legal conflict. Elizabeth relies on the expertise of her team at Fleming & Curti, and as the Firm approaches its third decade, she is proud of the culture of care and consideration that the Firm embodies. Finding workable solutions to sensitive and complex family challenges is something that Elizabeth and the Fleming & Curti team do well.

Amy F. Matheson


Amy Farrell Matheson has worked as an attorney at Fleming & Curti since 2006. A member of the Southern Arizona Estate Planning Council, she is primarily responsible for estate planning and probate matters.

Amy graduated from Wellesley College with a double major in political science and English. She is an honors graduate of Suffolk University Law School and has been admitted to practice in Arizona, Massachusetts, New York, and the District of Columbia.

Prior to joining Fleming & Curti, Amy worked for American Public Television in Boston, and with the international trade group at White & Case, LLP, in Washington, D.C.

Amy’s husband, Tom, is an astronomer at NOIRLab and the Head of Time Domain Services, whose main project is ANTARES. Sadly, this does not involve actual time travel. Amy’s twin daughters are high school students; Finn, her Irish Red and White Setter, remains a puppy at heart.

Famous people's wills

Matthew M. Mansour


Matthew is a law clerk who recently earned his law degree from the University of Arizona James E. Rogers College of Law. His undergraduate degree is in psychology from the University of California, Santa Barbara. Matthew has had a passion for advocacy in the Tucson community since his time as a law student representative in the Workers’ Rights Clinic. He also has worked in both the Pima County Attorney’s Office and the Pima County Public Defender’s Office. He enjoys playing basketball, caring for his cat, and listening to audiobooks narrated by the authors.