Several key provisions in the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. This creates a complex landscape for estate planning, particularly regarding gift and estate taxes. The upcoming presidential election features candidates with starkly different tax proposals to address the sunsetting of these provisions. Former President Donald Trump has indicated support for extending or making permanent the TCJA as it stands, while Vice President Kamala Harris has proposed reducing estate tax exemptions and increasing rates. With such divergent approaches, financial planners and managers working with high-net-worth families need to understand the current laws, proposed changes, and how these factors might affect wealth transfer strategies.
Current Estate and Gift Tax Exemptions Under the TCJA
The TCJA, passed in 2017, significantly increased the federal estate, gift, and generation-skipping transfer (GST) tax exemptions. As of 2024:
- Individuals can transfer up to $13.61 million without incurring federal estate or gift taxes.
- Married couples can transfer up to $27.22 million.
- These amounts are adjusted annually for inflation.
However, these increased exemptions are temporary. Under current law, they are set to expire on December 31, 2025. After this date, the exemptions would revert to their pre-TCJA levels, adjusted for inflation. Estimates suggest the individual exemption could decrease to around $7 million.
Potential Impacts of the 2024 Election
The outcome of the 2024 presidential election could influence the future of estate and gift tax policies. Different candidates have proposed varying approaches:
Former President Trump has generally supported maintaining or expanding current tax benefits. Some proposals include:
- Extending the TCJA provisions beyond 2025
- Potentially making the current high exemptions permanent
Vice President Harris has suggested reducing estate tax exemptions and increasing rates. For example:
- Reducing the estate tax exemption to $3.5 million per individual
- Increasing the top estate tax rate from 40% to 45%
- Eliminating certain valuation discounts used in wealth transfers
- Applying stricter rules to estate planning tools like grantor-retained annuity trusts (GRATs)
It’s important to note that these are proposals, and any changes to tax law would require congressional approval.
Wealth Transfer Strategies to Consider
Given the potential for change, financial advisors may consider several strategies for their clients:
- Lifetime Gifting: Use the current high exemption amounts before they potentially decrease.
- Annual Exclusion Gifts: Individuals can give up to $18,000 per recipient per year (as of 2024) without affecting their lifetime exemption.
- Irrevocable Trusts: These can provide tax benefits and flexibility in estate planning.
- Family Limited Partnerships (FLPs) or Limited Liability Companies (LLCs): These structures can be used for businesses or real estate holdings to potentially reduce the taxable value of assets.
- Intra-Family Loans: These can facilitate wealth transfer while providing flexibility for future adjustments.
Planning for Uncertainty
While the exact outcomes of the 2024 election and future tax legislation are unknown, financial planners can take steps to prepare:
- Stay Informed: Keep up-to-date with proposed legislation and election developments.
- Develop Flexible Plans: Create estate plans that can adapt to various potential scenarios.
- Regular Reviews: Consistently reassess strategies as the political and legislative landscape evolves.
- Client Education: Help clients understand the current laws, potential changes, and how these might affect their estate plans.
Looking Ahead
The intersection of the 2024 U.S. presidential election and the scheduled expiration of TCJA provisions creates a complex environment for estate planning. While the future of estate and gift tax laws remains uncertain, understanding the current landscape and potential changes can help financial planners and their clients make informed decisions. As always, it’s advisable to consult with legal and tax professionals when making significant estate planning decisions.
Meagan Pritchard re-joined ARB in 2020 after initially starting her career at ARB out of college. She specializes in providing comprehensive tax consulting, planning and compliance and advisory services to businesses, private clients and family offices, individuals, trusts and foundations.
