Financial Advisor Magazine: Preparing for a tax law's expiration

By: Steve Wittenberg, Director of Legacy Planning, and Kelley Wolfington, Senior Wealth Strategist

Americans are facing a perfect storm in the next couple of years: 2024 is an election year, and there’s increased chatter, uncertainty and political divide. They’re also dealing with meaningful inflation and rising (if stabilizing) interest rates.

And of course, on December 31, 2025, the Tax Cuts and Jobs Act of 2017 will sunset and set the clock back on current income and estate tax rates.

Under the current tables, Americans enjoy the ability to pass on a bigger chunk of their wealth tax free: They can transfer $13.61 million free of federal gift or estate taxes during their lives or after death, or $27.22 million if they’re married and filing jointly (figures that will increase for inflation in 2025). Nevertheless, it’s important to recognize that state-level estate or inheritance taxes may still apply. Any assets above these amounts would be taxed at the federal level at 40% after the client dies. In addition, clients can currently gift $18,000 a year to anyone without gift tax—and it’s $36,000 if they’re filing jointly.

However, when the Tax Cuts and Jobs Act phases out, the federal estate exemption would be cut in half, falling to approximately $7 million per person (adjusted for inflation). While it’s unclear what will happen even before or after the law phases out, most planners think Congress likely won’t act until a new administration is in place (after 2024), if at all.

There are many powerful estate planning techniques that advisors can use to take advantage of the current higher gift amounts, and thus preserve wealth for their clients’ families and minimize the client’s tax impact before the end of 2025.

Planning opportunities

Of course, your client’s ability to plan or execute an estate plan strategy will depend on their personal goals and circumstances—how wealthy they are and the lifestyle they want. Not everyone can afford to irrevocably gift large sums of money outside their estate. There are levels of complexity and things that should be done in steps. What we know is that many clients are running out of time to effectively plan. Attorneys are inundated, and few will be able to take on new work going into 2025. They won’t be able to execute drafts at the last minute. Yet some plans need to be executed over multiple tax years to reduce the risk of an IRS audit.

Here are a few things to consider:

Your clients might want to do nothing. A qualified decision to do nothing is still a decision. Your clients will still have an opportunity to plan down the line, perhaps by engaging in philanthropy if they are charitably inclined. After all, each dollar to charity will reduce their taxable estate.

Your clients can use “estate freeze” techniques. If your client’s wealth exceeds the $13.61 million estate tax exemption now (and if it could also exceed the $7 million exemption in 2026), you might want to use techniques to help them reduce their exposure. This is particularly the case for those who are confident they have enough excess wealth to maintain their lifestyle.

There are many estate freeze techniques that come with their own pros and cons. For example:

• A client can make annual exclusion gifts. These can be done through gifts made outright or with money contributed to trusts or made through other avenues such as 529 plans.
• A client can use a lifetime exemption with a large gift through a trust. Here they can choose one among the “alphabet soup” of irrevocable trusts, including intentionally defective grantor trusts (IDGTs), spousal lifetime access trusts (SLATs), qualified personal residence trusts (QPRTs), irrevocable life insurance trusts (ILITs) or grantor retained annuity trusts (GRATs). Each has a specific purpose and can be drafted in flexible ways, though we’d recommend proceeding with caution since they’re intended to be irrevocable.

As many clients try to reduce their exposure to federal estate taxes, life insurance will often be part of the solution. Many clients are moving away from no-lapse guarantee policies to second-to-die policies (or survivorship policies), which are better suited to provide liquidity upon the client’s death and replenish an estate to “reimburse” heirs.

Ultimately, if your client chooses to use their estate exemption before December 31, 2025, they could be taking advantage of relatively low interest rates, lower business valuations, or asset value discounts. But the time to start putting a plan in motion is now, and advisors should be having these conversations with their clients to decide whether they want to use the exemptions before they disappear with the sunset of the 2017 law.