It’s a new year, and with the Trump administration taking charge of tax policy in Washington, if you’re a high-net-worth individual or family, this is a great time to revisit your wealth transfer strategies. Here’s our top items to review.
Estate tax exemptions
Estate tax exemptions have been favorable in recent years, thanks to the Tax Cuts and Jobs Act of 2017 that elevated the federal lifetime and estate tax exemption to an all-time high of $13.99 million per person ($27.98 million for a married couple). However, absent legislative action by the incoming administration, this exemption will expire at the end of 2025. Should it happen, the estate tax exemption will be cut in half to roughly $7 million per person ($14 million per married couple) in 2026. While the incoming administration has signaled intentions to maintain the current levels, and it seems likely that the higher exemption will be extended, at least temporarily, high-net-worth individuals and families should evaluate whether now’s still a good time to transfer wealth, regardless of whether any change in law is on the horizon.
Asset transfers: Why act sooner rather than later?
Alongside estate tax exemptions, it’s important to consider other time-dependent lifetime wealth transfer opportunities. Why? The assets you hold today will likely appreciate, and transferring them out of your estate now can leverage their lower current value and shift appreciation outside the reach of future estate taxes. For example, an asset worth $5 million today may be valued at $10 million or more in a decade. Transferring its value today ensures the appreciation remains unaffected by estate taxes, thus amplifying the wealth passed on to beneficiaries. In other words, by transferring the asset now, you essentially gift the appreciated value tax-free, maximizing the benefits of current laws and exemptions.
The effect of estate tax exemptions can also be amplified by applying valuation discounts or incorporating life insurance, ensuring capital is managed optimally and tax liabilities are minimized. Furthermore, by transferring assets to a vehicle such as a grantor trust, assets can grow free of income taxes while your taxable estate absorbs the income tax liability. This strategy helps in cushioning your estate from immediate tax charges, preserving wealth in the long term.
Tailored estate tax planning
Given the universe of options, good estate tax planning is an art, not merely a number-crunching exercise. It involves interpreting complex legal landscapes that can change unexpectedly and aligning your assets with current tax laws. Doing this requires vigilance and periodic adjustments. Therefore, it’s important to regularly update your balance sheet and adjust your strategies over time. Here are some examples of tailored strategies to consider across varying circumstances:
- If your family’s net worth consistently exceeds the estate tax limit, consider timely transfers to benefit from exemptions; taking advantage of these exemptions sooner ensures longer-term tax reduction benefits.
- If your required level of spending constrains your ability to use full exemptions, partial transfers might strike a balance. Running financial independence projections can highlight any excess capital available to transfer. In some cases, strategies such as spousal lifetime access trusts can offer a safety net that can retain access to transferred funds.
- If your net worth currently falls under the estate tax limit but your estate later faces an estate tax liability due to policy changes, a careful approach is warranted. Transferring assets during life can deprive you of a basis step-up upon passing, potentially decreasing the net inheritance benefits without estate tax offsets. In this situation, monitor your gifting practices using annual exclusion limits and assess when advanced planning techniques could be appropriate.
The estate tax environment has seldom offered such favorable conditions for wealth transfer. Elevated exemptions and relatively low interest rates present an ideal backdrop for transferring assets. And while there are currently no legislative changes on the horizon that target longstanding estate tax reduction strategies such as grantor retained annuity trusts, dynasty trusts, and valuation discounts, this should be periodically reviewed as the horizon may not always remain clear. Political efforts could push for reduced exemptions or even higher rates, along with the introduction of taxes that could erode these strategies.
Beyond taxes: Other benefits of lifetime transfers
While tax considerations often dominate wealth transfer discussions, numerous nontax factors should shape decisions as well:
- Asset protection. Transferring wealth during your lifetime often improves asset protection, offering a safeguarded layer against creditors, divorce, or other external threats.
- Income tax planning. Preemptive transfers can align with a broader income tax strategy, potentially mitigating liabilities and enhancing net fiscal positions.
- Educating family members. Asset transfers often provide the opportunity to educate inheritors on wealth management, cultivating financial literacy and fostering responsible stewardship.
- Ensuring continuity. Prudent wealth transfer ensures continuity of asset management, reducing the risks associated with sudden transitions upon one’s passing.
An example that commonly utilizes these benefits is the family that leverages their exemptions by making substantial lifetime gifts to their children and establishing a family foundation. Not only does this enable significant tax savings, but it also empowers the next generation with stewarding these funds and maintaining the family’s philanthropic legacy. This foresight illustrates how timely action coupled with strategic planning results in profound multigenerational benefits.
Looking ahead: Staying ahead of estate planning changes
Proactive wealth planning is all about understanding your financial situation, marshaling the resources to guide you through the legal framework around asset transfer and estate planning, and acting accordingly. Having a long-term, forward-looking strategy is crucial in staying ahead of potential legislative and administrative shifts. Today more than ever, it pays to be vigilant, informed, and ready to act — not just for potential tax savings, but for the enduring legacy you wish to create.
