Tax Planning for the Ultra-Wealthy: Navigating the Estate Tax Sunset
As the presidential race tightens, ultra-wealthy investors are taking urgent action in their tax planning, particularly due to concerns over potential changes to the estate tax. The scheduled expiration of a generous provision in the estate tax next year has become increasingly worrisome, given the likelihood of a divided government or a Democratic president. Under current law, individuals can transfer up to $13.61 million to family members or beneficiaries without incurring estate or gift taxes. For couples, the limit is $27.22 million. However, if the provision expires at the end of 2025, these exemption amounts will be cut in half, resulting in potential tax liabilities for estates exceeding $6 million to $7 million for individuals and $12 million to $14 million for couples, subject to a 40% transfer tax.
Wealth advisors and tax attorneys have observed that the expectation of a Republican sweep earlier this year led many wealthy Americans to adopt a wait-and-see approach, as former President Donald Trump aimed to extend the 2017 tax cuts for individuals. However, with Vice President Kamala Harris and Trump currently tied in the polls, the chances of the estate tax benefits expiring have increased. This uncertainty has prompted a sense of urgency among high-net-worth individuals, who have been delaying their tax planning decisions.
The potential expiration of the estate tax exemption and the subsequent response from the wealthy have significant implications for inheritances and the transfer of trillions of dollars from older to younger generations in the years to come. It is estimated that over $84 trillion will be transferred to younger generations in the coming decades, and the impending estate tax “cliff” is set to accelerate these transfers in the current year and the next.
One of the key questions facing wealthy families is how much to give and when, in anticipation of potential changes to the estate tax. If they do nothing and the estate exemption drops, they risk facing tax liabilities on estates exceeding $14 million upon their death. Conversely, if they give away the maximum amount now and the estate tax provisions are extended, they may experience “givers’ remorse” for unnecessarily giving away money due to fears of tax changes that never materialize. To avoid such remorse, wealth advisors recommend that clients carefully consider different scenarios, their lifestyle needs, and the affordability of making irrevocable gifts.
It is essential for families to ensure that their gift decisions are not solely driven by tax considerations, but also take into account family dynamics and personal preferences. While maximizing the current exemption of $27.22 million may seem attractive from a tax perspective, it may not always align with the family’s goals and values. Advisors emphasize the importance of peace of mind and overall financial independence for wealthy parents and grandparents, who may harbor concerns about outliving their wealth. Psychological comfort plays a significant role in decision-making, alongside the quantitative analysis of affordability.
Additionally, some families may worry that their children are not yet ready to handle large amounts of wealth. Those who originally planned to make substantial gifts in the future are now feeling pressured by the potential tax changes to proceed with their plans sooner. To address these concerns, advisors recommend structuring gifts to provide flexibility, such as gifting to a spouse first before passing it on to the children, or setting up trusts that distribute funds gradually to mitigate the impact of “sudden wealth syndrome” on younger beneficiaries.
For families intending to take advantage of the estate tax window, the time to act is now. Drafting and filing transfers can be a time-consuming process, and during the last similar tax cliff in 2010, many families faced delays and complications due to overwhelming demand for gift processing and trust establishment. Advisors warn that the same risk exists today if wealthy individuals wait until after the election to make their moves. Already, some attorneys are turning away new clients due to the surge in demand.
Rushing into action, however, can also present risks, particularly when it comes to dealing with the IRS. There have been cases where couples’ tax strategies were undone by the IRS, resulting in unexpected gift tax liabilities. Taking the time to carefully plan and execute transfers is crucial to avoid such pitfalls.
While advisors and tax attorneys report that their wealthy clients are also inquiring about other tax proposals from the presidential campaign, such as higher capital gains and corporate taxes, the estate tax sunset remains the most pressing and likely change. Inquiries regarding the estate exemption have surged in recent months, with more individuals now executing their wealth-planning strategies.
Overall, the tightening presidential race has spurred ultra-wealthy investors into action, with tax planning taking center stage. The potential expiration of the estate tax provision has created a sense of urgency among high-net-worth individuals, who are now grappling with the question of how much to give and when. Advisors stress the importance of considering both tax implications and family dynamics when making gift decisions. The window of opportunity to utilize the current estate tax exemption is closing, and families need to act swiftly to avoid potential pitfalls and ensure the smooth transfer of wealth to future generations.
