Richard K Newman
There are times in life when opportunity knocks, and those who take advantage of it often come out ahead. The challenge lies in recognizing those opportunities when they occur. Wealthy clients are currently facing likely changes to the estate tax laws that necessitate action. And while those changes won’t be working in their favor, careful planning now could improve outcomes down the road.
In 2017, the Tax Cuts and Jobs Act (TCJA) nearly doubled the lifetime estate and gift tax exemption from $5.6 million for individuals and $11.18 million for couples to $11.18 million for individuals and $22.36 million for couples. In 2023, that exemption is $12.92 million per person and $25.84 for married couples. But those provisions are scheduled to expire at the end of 2025. If no legislation is enacted between now and then, the provisions will return, to 2017 levels. At the same time, the top income tax rate will revert to 39.6%, impacting wealthy clients significantly.
With that in mind, this may be an opportune time for estate planning and a good time to reach out to your clients. Take advantage of the fact that real estate values are starting to move back down, the stock market is down, and interest rates are up. This is an environment much like what we experienced at the onset of the COVID-19 pandemic. Think back to early 2020 when news of the virus spread, and housing prices and the stock market plummeted. It was an excellent time to do a valuation and transfer assets out of an estate. Individuals who took advantage of that situation came out ahead.
Our current economic situation presents a similar opportunity and now is the time to start planning and strategizing. This is especially true for married couples with estates worth at least $13 million or more and individuals with estates valued between $6.5 million and $13 million. It’s important not to wait too long, not just in light of the current economic conditions but also because life can deal a bad hand when least expected. Recently, I learned the unfortunate news that three of my closest friends might be facing terminal illnesses. This type of diagnosis is a stark reminder that most of us may never be healthier than we are today. That alone should prompt individuals to act.
When planning, keep in mind the importance of accounting for the potential appreciation of assets. The longer the transactions are in place, the greater the benefit. While the adopted strategies will immediately reduce estate tax consequences, the real value comes over time as the assets continue to grow without additional estate tax consideration. At the same time, it’s critical to ensure that the estate creator has sufficient assets and income to continue living a successful life.
How to prepare
Wealthy individuals can benefit from several strategies that allow them to transfer or gift assets for tax-efficient outcomes. Clients should begin by taking full advantage of the lifetime gift exemption. Tax law changes in 2017 reduced the cost of distributing wealth while the client is still living by doubling the amount a couple can transfer tax-free during their lifetime. Even if the client does not currently have this type of wealth, there’s a chance they might by the time the changes take place.
At the same time, any gifts should come from assets most likely to appreciate. The sooner those assets are transferred, the better. Clients who gift assets during their lifetime can save significantly on taxes, especially while the current laws are still in effect. A married couple can give each child $34,000, which increases if the child is married and has children.
Along with gifting strategies, clients should consider establishing irrevocable trusts that may or may not have generation-skipping provisions and various types of trusts, limited liability corporations (LLCs), and family limited partnerships. Individuals considering transferring privately held assets will probably need to obtain a business valuation to ensure that IRS requirements are properly adhered to.
Some more popular and effective options include irrevocable life insurance trusts, (ILITs) grantor-retained annuity trusts (GRATs), and spousal lifetime access trusts (SLATs). These make it possible to reduce the impact of taxes on the client’s estate. Life insurance should also be part of the conversation, particularly because higher interest rates make policies less expensive—and, as mentioned previously, because clients will probably never be healthier than they are today.
Change is likely
Although it’s possible that new legislation could take place between now and the end of 2025, it’s best to plan with the understanding that current provisions could expire. This is not a time to sit back and wait to see what the potential new legislation might be. Waiting could put your clients in the unfavorable position of not saving on estate taxes.
At the very least, there will be a change to the gift tax exclusion unless a new law is enacted. And there could be several changes that result in increased tax bills for estates, from an increased estate tax rate to limiting valuation discounts on the transfer of interests in family-owned businesses and eliminating the income tax-free cost-basis step-up. While it’s true that not all of these proposals could become law, Congress will no doubt be looking at ways to raise revenue.
In the meantime, it’s best to plan for an increase in taxes in 2026. Please feel free to contact us today for a confidential and complimentary meeting to discuss.
About the Author
Richard K Newman
Richard is a well-known life insurance expert who works with CPAs, attorneys, Registered Investment Advisors and nonprofits. For more than 35 years, he has guided clients with their estate planning, wealth transfer and tax-related matters.