Matz Featured on Tax Issues Facing Family Offices

Crain Currency: As we head into the fall, what do family offices need to know for their tax planning – such as provisions in the One Big Beautiful Bill provisions that will impact their tax liability this year?

Kevin Matz: Before December 31, 2025, as planners we were concerned that “the sky is falling” — we were concerned that there was going to be a reduction in the [federal estate and gift tax lifetime] exemption from a very robust level — $10 million. With indexing, it was going to go up to about 14.4 million but there were concerns that it could be halved. But the sky did not fall. We could basically see that was going to happen by virtue of the election in 2024. But it didn’t get finalized until the One Big Beautiful Bill.

Now we have settled law, so-called “permanent” law — you know what that means? It means until there’s another Congress and an administration that decides differently.

CC: What does that mean for family trusts?

KM: I like to think of it in terms of a tax fence — when you get wealthy, you want subsequent growth in value outside of the tax fence, to produce wealth for one’s descendants and their children further down the road. You can also include a spouse in there, that’s quite popular.

Much of the focus has switched to income taxes. But not those with hundreds of millions. Let’s say that you’re a married couple with somewhere between $15 million and $30 million. Putting aside state tax — and in New York state, there’s only an exemption right now of $7,350,000. And New York has this very unusual feature of the law called a cliff that says we’re going to give you a credit that corresponds to a tax-free zone of $7,350,000. But once you’re slightly above it, we’re going to take away the credit so that when you’re 5% above that, which is slightly north of $7,700,000, you will be taxed from $1 on. So there’s still a need to plan for New Yorkers if you expect to be north of that amount. But for federal taxes, that exemption is about $15 million and you have portability between you and your spouse which means $30 million essentially. And then you don’t have to worry about federal estate tax.

And you get a step-up in basis for income tax purposes to fair market value and date of death. Let’s say someone has Apple stock that was purchased at $2 million. It ends up appreciating to $10 million. That’s $8 million of appreciation. If you get that, and say the trust to which you gifted sells it the very next day, they have a built-in $8 million gain, right? However if they die owning it, they get a step up in basis to the date of death to $10 million dollars. That built-in capital gain of $8 million dollars is eliminated just by dying and holding it because they’re below the thresholds.

And let’s say they don’t live in a state like New York that has an estate tax, but some state like New Jersey or Florida that does not have an estate tax anymore. Nowadays by dying and holding it, that’s the best planning they could do as opposed to engaging in elaborate planning to get assets outside of their state because that won’t save estate taxes but it will increase income taxes due to the potential lack of a step-up basis for assets outside of their state.

CC: What about the 2/37 cutback rule for itemized deductions, the potential for double taxation of trusts, new charitable deduction rules?

KM: The 2/37 rule is something that I don’t think people have focused enough on. There was a recent report by a joint committee on taxation saying that the various provisions in the OBBB are essentially double taxation. The nature of trusts in the states is that you either tax a trust or you tax a beneficiary but you don’t tax both. And there’s a mechanism in tax law called distributable net income that is the mechanism to determine whom we tax — the trust in the state or the beneficiary who’s receiving distributions.

That changed with the OBBB because the law says we’re going to cap the maximum tax deduction that you can get at 35 percent including on income that’s taxed at 37 percent. Say you have a million dollars of taxable income and it generates $370,000 of tax and it’s all distributed out to the beneficiary. Before OBBB, you get a million-dollar deduction for the distributions. And the beneficiaries get taxed on a million. With OBBB, by virtue of the 2/37 limitation, the cutback at itemized deductions, which includes the deduction for distributed net income, you limit the tax benefit, so that’s no longer a benefit of $370K. You limit it to $350K. But there’s still $370K worth of tax. You’re essentially going to have some tax on amounts left over from the trust, even though the trust has distributed all of its income to the beneficiary.

So you now are introducing double taxation in a system that never, ever envisioned it. And people say that this only applies to very wealthy individuals who set up trusts. Not always. It can be supplemental-needs trusts that are set up for disabled persons. Or just smaller trusts that are set up for individual family members.

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