The possible expiration of some provisions of the Tax Cuts and Jobs Act in three years is beginning to turn up the heat on estate tax planning.
Though Congress might extend some provisions, it’s impossible for plannerrs to know what parts of the legislation will remain. Without action from Capitol Hill, two of the biggest potential changes that could impact wealthy clients are the top income tax rate reverting to 39.6% and an about halving of the federal estate tax exemption, which is $12.92 million for 2023.
Sunset of the Tax Cuts and Jobs Act will impact wealthy clients significantly and could expose more estates to a 40% federal estate tax, said Virag Shah, portfolio strategist with Van Leeuwen & Company in Princeton, N.J.
Isaac Bradley, director of financial planning at Homrich Berg in Atlanta, sees the estate tax problem as “undoubtably” the biggest potential hit for wealthy clients. “Clients most impacted will be those with estates of $13 million to $26 million-plus (for married couples) and $6.5 million to $13 million-plus (for singles with no spousal allowance) who intended to leave their estate to individuals,” he said. “Currently these [persons] have little to no estate tax liability but will have significant liability on Jan. 1, 2026.”
Transferring wealth efficiently right now might require creative thinking with established tools. These could include trusts, family limited partnerships or a limited liability company or charitable entities, said Mallon FitzPatrick, managing director and principal at Robertson Stephens Wealth Management in New York. “In 2021,” FitzPatrick said, “it was popular to set up a SLAT [spousal lifetime access trust] or other types of grantors trusts to take advantage of the higher lifetime exemption as a pre-emptive step to the Build Back Better Act lowering the exemption.”
“I haven’t had to discuss irrevocable life insurance trusts (ILITs) for quite some time. That might be a topic of conversation again,” said Ginger R. Ewing, private wealth advisor at Ameriprise Financial in Eagan, Minn.
“Keep making annual exclusion gifts of $17,000 per individual per donor,” Shah said. “The other consideration for wealthy individuals is to use the full lifetime estate tax exclusion at once and consider gifting the max amount of the allowed exclusion before the law sunsets.”
Another advisor said the annual exclusion is a useful tool.
“Taking advantage of the annual exclusion gift limits can be a powerful estate planning tool over time … especially if there are multiple family members and a long runway in terms of how many years you can make these gifts,” added Alexandra Blake, director and wealth advisor at Crestwood Advisors in Darien, Conn. “A married couple can gift each child $34,000, even more if that child is married and/or has children, since each recipient is eligible for that amount. This adds up and is a very simple way to effectively move assets out of the estate.”
Create a family limited partnership for investment assets and use the annual exclusion gift to transfer additional ownership of the family partnership to the next generation each year. “You often get the added bonus of taking a discount on the assets given the illiquid wrapper of a family partnership, which means you can transfer 15% to 40% more than the just the annual exclusion gift amount,” Blake said.
Wealthy clients with major assets in IRAs who don’t need the money to maintain a lifestyle may find converting the IRA to a Roth is a good estate planning strategy to transfer a ‘tax free’ account to heirs, FitzPatrick said. “Especially with the new IRS Inherited IRA rules likely going into effect this year,” he added. “Roth conversions should also be completed prior to 2026 to take advantage of lower income tax rates before the potential rise after the TCJA.”
Still, the uncertainty about the tax law will require advisors and clients to weigh their options.
“But we also don’t want to become alarmist and have clients do major gifts only to find out that Congress acts and extends the current exemptions,” Ewing said. “It’s a delicate balance between preparation for major gifts of large family businesses and waiting to actually execute on them until 2025.”
