Estate planners, wealth management advisors, and high-net-worth families are paying particularly close attention to this November’s federal elections due to the potential impact it could have on the federal estate tax landscape.
Since the passage of the Tax Cuts and Jobs Act (TCJA), which became effective Jan. 1, 2018, the rules regarding how much of a taxpayer’s estate can be sheltered from the federal gift, estate, and generation skipping transfer (GST) tax have been relatively stable. In 2024, each taxpayer has an applicable exclusion of $13,610,000 from these taxes, and this amount is scheduled to increase in 2025 with an annual inflationary adjustment.
However, this historically high exclusion amount and the vast majority of the TCJA are set to “sunset” to the prior formula, effectively cutting the exclusion in half on Jan. 1, 2026.
While the fate of this exclusion reduction is scheduled to occur by law, a new Congress could introduce legislation in 2025 to extend the current rules, increase or reduce the exclusion amount further than is scheduled, or take some other step to change the effective rate or way the tax is applied to transfers of wealth.
The expiration of the TCJA, including the estate, gift, and GST tax exemption, will be a significant event for almost all taxpayers and will undoubtedly be a priority for Congress and the president next year. The November election is an important first step in that process as it will set the stage for such deliberations. On the campaign trail, former President Trump has advocated to make the tax cuts within the TCJA permanent. Meanwhile, Vice President Kamala Harris has continued President Biden’s campaign promise to repeal the TCJA and use any new revenue to fund her program priorities. Irrespective of the occupant of the White House, Congress will have a heavy hand in tax legislation, with individual members of Congress expected to shape key aspects. Looking ahead, we anticipate complex legislative negotiations that will begin in earnest after the election.
The uncertainty over the future of these estate tax laws leaves many high-net-worth individuals and families wondering what can be done now to prepare for the variety of potential tax law changes. Consider adopting the following process:
- Prepare or update your personal balance sheet. It’s vital to prepare an up-to-date, comprehensive inventory of your assets and liabilities and their fair market values. Make note of how assets are titled among trusts, spouses, or other joint owners, and list initial and contingent beneficiaries of assets like retirement accounts, life insurance policies, and “transfer on death” accounts.
- Review your “crisis plan” to determine how (or if) scheduled changes could affect your estate plan. There are likely several tax-sensitive provisions in your will, revocable living trust, and any irrevocable trusts created for your benefit, and it’s important to understand how these provisions incorporate the present and possible future tax rules to your estate upon your death.
- Meet with your wealth management team and legal advisors to consider if advanced planning is appropriate. There are a variety of strategies, from simple to complex, that high-net-worth families can consider to help manage their potential estate tax liability. Many of these strategies require action prior to the scheduled sunset of the federal gift, estate, and GST tax exemption, so beginning the process now is recommended.
The upcoming federal elections will have relevance for all Americans. For wealthy families, the outcome may have a significant impact on structuring their wealth during their lifetimes, and legacy planning for heirs, charities, and other beneficiaries.
