Each year, we send a letter to clients to help guide our year-end planning discussions with them and to offer ideas for them to consider with their other advisors. Our goal in year-end discussions is to ensure that client plans are updated as needed, based on changing external conditions as well as the client’s circumstances, so that we stay on track to deliver the long-term outcomes that each client seeks.

This year, two substantive factors—the 2017 tax overhaul and rising interest rates—will be important considerations in our year-end planning work.

As we discuss below, the new tax law offers a number of opportunities for adjusting long-term plans. Notably, the new law doubled individual and family exemptions for estate, gift, and generation-skipping transfer taxes. This change may offer new planning flexibility to many clients that had previously used up their exemptions. Other changes, such as reduced corporate tax rates, additional benefits for pass-through entities and modified rules on how charitable deductions are treated, should all be considered within the context of existing trust plans and philanthropic strategies. Rising interest rates will also influence the advisability of some planning steps vs. others. The universe of trust vehicles is quite varied, and different structures benefit from different economic conditions—some offer stronger benefits in a low-rate environment while others offer greater benefit when rates are higher.

However, we want to emphasize that the primary goal of our planning work with clients is to build a stable, long-term structure above all else. It is always tempting to conclude that just because we can do something new, we should do something new. That is quite often not the case. Because of this, we carefully review with our clients every option to advance or modify their plans, against the backdrop of their unique circumstances. In a year when there are meaningful external shifts in law and economics to consider, it is doubly important to ensure that we retain our focus on consistency and stability.


The 2017 tax overhaul was broad in scope. The new law includes significant corporate tax cuts, and while benefits for individuals and families are not quite universal (benefits will be muted, for example, for taxpayers in high-tax states with booming real estate values), the tax overhaul lowered marginal rates across the board and instituted a wide range of other benefits.

Increased transfer tax exemptions. The 2017 tax act effectively doubled federal estate, gift, and generation-skipping transfer tax exemption limits. Before the law was passed, the limits were set at a level of $5 million per individual and $10 million per couple (indexed for inflation with a base year of 2011). Now those limits are $10 million and $20 million respectively; after factoring in inflation, the 2018 limit is $11.18 million per individual, and a married couple can pass on up to $22.36 million of assets without incurring transfer tax.

This change could have meaningful implications for many families. At a high level, the IRS estimates that only 1,800 estates will pay estate tax in 2018, vs. 5,000 in 2017. Virtually all of our clients will be impacted somewhat. Many clients whose net worth exceeds the new exemption amount may want to consider the option of making substantial gifts to remove additional assets from their estates. The fact that the provision may sunset in 2025 may spur some clients to make those gifts now, although a number of other factors (age, nature of the assets being gifted, etc.) will also influence any decisions about a substantial new gift or transfer. Of particular importance when considering new gifting strategies is one’s state of residency/domicile. The estate tax exemption in many states is still significantly lower than the new federal limits, so the impact of state estate taxes need to be taken into account. For clients whose net worth falls below the federal exemption limit, we still recommend that they review their existing estate planning documents with us and their other advisors, to determine if any of the new tax formulas are poised to create undesirable results.

More broadly, the reduction or elimination of estate tax may shift the focus of many client conversations to other estate planning issues. Families may have additional flexibility now to manage the cost basis of assets (for example, they may be able to include appreciated assets in the taxable estates of family members with unused exemption, and subsequently benefit from a step-up in basis). Moreover, the ability to gift substantially more to descendants brings challenges as well as opportunities, so clients may wish to refocus on how much is enough—or too much—in terms of gifts for beneficiaries, and potentially consider spendthrift trust provisions and other asset-protection planning steps.

Individual income tax changes. The changes to the basic marginal rate schedule for individuals and families should benefit nearly all taxpayers. However, the new rules also greatly reduce deductibility of state and local taxes and property taxes from federal taxable income. For some taxpayers in high-tax states, the reduced marginal rates and reduced deductions may largely cancel each other out and in some cases the net effect of the tax overhaul may be a slightly higher tax bill.

Another consideration is that the standard deduction has increased to $24,000 for a married couple filing jointly. This will effectively eliminate the charitable deduction for taxpayers whose overall deductions (including charitable gifts) do not exceed the new standard deduction. Some taxpayers may therefore benefit from concentrating their gifts within a single year: For example, if you gift $10,000 per year for five years and never exceed the standard deduction threshold, you could consider bunching that $50,000 of gift activity in one year so you can deduct a healthy portion of that amount from your income that year. If you want to concentrate your gifting in that manner but still want to space out actual distributions to charities on a different schedule, you can make your gift to a donor-advised fund (DAF), and then arrange for distributions to flow from the DAF over time.

An additional note with regard to charitable gifting: Under the new law, larger cash gifts are now deductible up to 60% of adjusted gross income (AGI), vs. only 50% of AGI under prior law. As such, these types of gifts may offer greater tax benefits in certain situations.

Finally, we note that the tax treatment for alimony payments will be different as of Jan. 1, 2019. Under the new law, alimony will no longer be deductible by the payor, nor will it be included in the payee’s taxable income. Agreements signed by Dec. 31, 2018 are grandfathered under the prior rules (meaning that alimony payments will be deductible for payors and taxable for payees), so clients who are negotiating alimony arrangements will need to factor the new rules into their negotiations and into the timing of when agreements are signed.

New tax rates for businesses. The 2017 tax act significantly reduced income tax rates for certain types of businesses. One of the most highly publicized elements of the new tax law was the substantial rate cut for C corporations to 21% from 35%. Additionally the new law established deductions for taxpayers who pay tax on income from certain "pass-through" entities (including partnerships, LLCs, S corporations, and sole proprietorships) that operate qualified trades or businesses. The deduction does not apply to all pass-through businesses, and the rules governing these deductions are exceedingly complex.

These new rates and deductions give rise to several planning considerations. Businesses that retain and/or reinvest most of their income may want to convert to a C Corporation, to take advantage of the lower tax rate. Conversely, business owners may benefit from segregating assets and lines of business into separate pass-through entities, to ensure that certain business activities qualify for the new deduction. Finally, if owners of a pass-through entity transfer their ownership to separate non-grantor trusts, they may be able to avoid the income limitations on the availability of the deduction.

For any clients considering steps such as these, we would advise doing so only after careful consideration and in consultation with their advisors. In particular, self-employment taxes, excess accumulation taxes and personal holding company taxes, and the qualified small business stock (QSBS) capital gains exclusion are all factors that could impact one’s decisions in this planning arena.


Our checklist is not intended to be a comprehensive planning tool, but rather a guide that can hopefully spur more in-depth conversations with our clients and their other advisors.

Brown Advisory 2017 Year-End Planning Checklist for Individual Investors and Families


Prevailing interest rates impact the effectiveness of many estate planning techniques. When rates rise or fall, those changes directly translate into the “applicable federal rates” or “AFRs” set by the IRS for use in various calculations related to trust and estate planning. Certain techniques work better in different interest-rate and yield-curve environments. In the current environment we see a variety of trust structures as offering potential value to clients.

Short-term interest rates have been rising steadily, but AFRs remain low relative to historical norms. Moreover, because the yield curve has been flattening, long-term AFRs (as of November 2018) are more attractive vs. short-term and mid-term AFRs than they were in the recent past. Accordingly, we believe it is worth considering techniques that work well when AFRs are lower than expected equity returns. These include:

Loans/Sales: Family members can lend to one another at rates equal to applicable AFRs. Such loans let clients shift investable capital to a younger generation without incurring a gift tax. Borrowers will receive the spread between the interest owed and whatever return they can earn on the portion of the loan that is invested. This strategy can facilitate the sale of assets to a family member who can fund the purchase by taking a loan.

Grantor Retained Annuity Trusts (GRATs): A GRAT is established for a specific term of years, with its creator (the “grantor”) contributing assets in trust. During the term of the trust, the grantor retains the right to receive the original value of the assets used to fund the trust, plus a rate of return based on the current relevant AFR. When the trust terminates, remaining assets that appreciated above the AFR threshold are distributed to beneficiaries.

Charitable Lead Annuity Trusts (CLATs): A CLAT pays a fixed amount each year to charity, with the remainder at the end of the trust’s term going to noncharitable beneficiaries. Given that interest rates still sit at historically low levels, clients with philanthropic goals seeking estate reduction may wish to consider creating a CLAT. As with GRATs, the annual payout requirement is dictated by IRS guidance, so when rates are low, payouts can also be lower, which leaves more assets in the trust for later distribution to the noncharitable beneficiaries. These transactions are designed not to generate gift or estate taxes.

Conversely, AFRs have risen meaningfully, and certain techniques that work well when discount rates are higher are now becoming more attractive. These include:

Qualified Personal Residential Trusts (QPRTs): A QPRT allows a parent to transfer a residence to children while still living in the home rent-free for a specified term (the parent may remain after the term expires by paying rent). The value of the gift equals the home’s value, discounted to net present value from the end of the QPRT’s term. The discount rate is based on the AFR, and a higher AFR results in a lower value for gift tax purposes. Moreover, any appreciation in home value after the QPRT is established passes to the children free of any further gift tax.

Charitable Remainder Trusts (CRTs): CRTs, put simply, can generate potential income for a donor or other beneficiaries for a set term (no more than 20 years) or until the donor’s death, with the remaining assets at the end of the term going to a designated charity or charities. CRTs are a good option for appreciated assets, as the trust can sell the assets free of capital gains taxes and thus preserve the full fair-market value of those assets (the income stream, however, is still subject to ordinary income tax each year). Donors can take a partial income tax charitable deduction when they fund the trust, equal to the value of the remainder gift to the charitable beneficiary. In this calculation, a higher AFR results in a lower net present value for the expected income stream, and therefore a higher value for the charitable remainder for income tax purposes.

We want to emphasize that these, or any other trust vehicles, need to be considered against a broader set of planning factors—tax mitigation is an important goal of our planning work but it is subordinate to the broader family, legacy and philanthropic goals we seek to help clients achieve.


Much of this letter has focused on timely topics related to either the new tax law or the shifting interest-rate environment. Of course, there are also a host of planning matters that make sense to review and consider year in and year out, regardless of what may be happening specifically with markets, tax legislation or other external factors.

With regard to income taxes, we can work with clients to look for opportunities to harvest losses, and to accelerate or decelerate income and gains to occur during the optimal tax period. Additionally, we can help coordinate with clients and their tax advisors on estimated tax payments, in an effort to help ensure protection against penalties for income tax liabilities without overallocating for that protection. And there are many other “blocking and tackling” steps we can consider, such as reviewing any and all existing trusts and trust documents to verify that they are fully aligned with clients’ evolving goals, and reviewing their other “framework” documents—wills, health care proxies, living wills, powers of attorney—to confirm that their intentions for their legacy will be carried out as they wish. All of these discussions are important steps in our ongoing effort to help clients achieve their long-term objectives through prudent planning, and we greatly look forward to these conversations as the year draws to a close. 

The views expressed are those of Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested.

The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client.

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