Broker Check

Anticipating the Sunset of Trump Tax Cuts in Estate Planning

March 01, 2024

The following article is based on our recent Lifetime Planning podcast, Advanced Estate Planning Strategies Ahead of the 2024 Elections, with Financial Sense Wealth Management’s Jim Puplava and Rob Strauss, estate planning expert at Weinstock Manion.


The Uncertain Future of Estate Tax Exemptions

With the looming expiration of the Trump tax cuts in 2025, significant changes are on the horizon for estate planning. Currently, individual estate tax exemptions stand at a sizable $13.61 million, with inflation expected to drive a modest increase by 2024. Historically, these numbers represent an unprecedented opportunity for asset protection and wealth transfer. However, an essential provision—baked into the legislation—dictates a reversion to approximately half of the pre-existing threshold, potentially down to $7 million for individuals and $14 million for married couples. This shift in the estate tax exemption is guaranteed unless Congress intervenes, leading to complex strategic planning challenges for individuals, particularly those holding substantial assets.

The estate tax exemption's future is tightly interwoven with political currents. The outcome of elections and subsequent control over the presidency, House of Representatives, and the Senate - especially a supermajority - will largely influence whether the exemption remains elevated, decreases, or undergoes further transformation, said Rob Strauss, an estate planning attorney at Weinstock Manion. Historically, tax compromises have been unpredictable, leading to scenarios different from expected policy positions signaled during campaign trails. Therefore, the political landscape's direction in upcoming years becomes crucial for those planning their estates.

The Strategy Shift for Estate Planning Professionals and Clients

The mere possibility of a decrease in estate tax exemption is a clarion call for estate planning attorneys and their high-net-worth clientele to begin strategizing sooner rather than later. If the exemptions are halved as anticipated, the window for taking preemptive action would be constrained to a short time frame, potentially leading to a rush on legal and financial advisors’ services, cautioned Strauss. Estate planning professionals aptly voice concerns about this bottleneck, stressing the importance of beginning the decision-making and implementation process well in advance.

Clients with assets far surpassing even the potentially reduced exemption levels find themselves in an advantageous position to act regardless of political outcomes, as their estate planning needs eclipse the exemption threshold currently and in the foreseeable future. Conversely, individuals whose assets hover near the existing or projected exemption thresholds face tougher choices. Holding onto assets might currently be beneficial for capital gains purposes, yet should the exemption decrease, proactive measures like trust formation and asset transfers could become appealing or even necessary to mitigate taxable estates.

Addressing Compressed Timelines with Proactive Planning

Advanced estate planning becomes instrumental, especially for those owning closely held businesses, which may not possess sufficient liquidity to cover a 40% estate tax commonly levied on estates surpassing the exemption threshold, Strauss said. Establishing irrevocable trusts acts as a tax planning mechanism that needs detailed attention well ahead of potential legislative changes. The call to action resounds clearer as year-end approaches, when professionals must reevaluate after election results, potentially affecting the exemption size and planning logistics for the following year.

Some clients are adopting a forward-looking approach by preemptively establishing trusts despite the uncertain necessity of their eventual use. Strauss described this strategic move similar to purchasing an "option," a safeguarding measure to ensure that mechanisms for asset protection are in place should the need to utilize them arise suddenly. Advising clients to engage in such foresight adopts a position that it’s better to deliberate upon and lay the groundwork for the significant financial decisions ahead of time rather than be caught in a capacity crisis among estate planning professionals.

In anticipation of the challenges posed by the sunsetting Trump tax cuts, clients and their advisors are therefore urged to deliberate on the size of their potential estate tax liabilities and take action before the time to do so may compress dramatically. Proactive, well-timed decisions and trust establishments can provide a sense of security and preparedness against a backdrop of evolving tax legislation.

Innovative Techniques in Estate Planning: Beyond the Basics

As estate planning professionals grapple with the potential sunset of the Trump tax cuts, cutting-edge strategies are becoming more prominent in discussions with clients. One such innovative technique is the utilization of irrevocable life insurance trusts (ILIT), commonly referred to as eyelets. These trusts provide a strategic avenue for creating necessary liquidity in an estate, particularly important for those that contain significant illiquid assets such as real estate and business interests.

The main advantage of using an ILIT is its ability to pay out life insurance proceeds to beneficiaries upon a client’s passing, which can be designed to cover estate taxes and thus preserve the value of the estate for future generations. Given the procedural complexities of setting up an ILIT, and the sophisticated nature of allocating generation-skipping transfer (GST) exemptions, this method requires careful planning and precise execution. Tailoring an ILIT to accommodate generation-skipping expectations enhances its efficiency, allowing it to serve multiple generations without incurring additional estate taxes.

When creating an ILIT, it is critical to avoid standard approaches that could limit the trust's effectiveness relating to GST exemptions. By initially making nominal cash gifts to the ILIT and subsequently arranging for the trust to borrow funds necessary for premium payments, Strauss explained, clients can take advantage of a higher degree of tax exemption. Such an arrangement can be structured in concert with gift trusts created for children or Spousal Lifetime Access Trusts (SLATs) set up between spouses.

Moreover, this borrowing strategy can lead to an ILIT that is 100% generation-skipping exempt, he said, with the added flexibility that the client can still act as trustee for the gift trusts. This latter point is particularly relevant as the client may be precluded from serving as the trustee of the ILIT due to regulatory requirements.

It must be emphasized, however, that these advanced techniques are complex and nuanced. They demand a high level of professional expertise to draft and manage effectively. Estate planning for high-net-worth individuals with substantial assets, therefore, entails an intricate analysis of their current and future needs, alignment with estate planning objectives, and a proactive approach in anticipation of legislative changes that could impact their financial legacy.

Individuals with sizeable estates are encouraged to contemplate the various strategies discussed, not only to optimize the advantageous exemption levels currently in place but to also circumvent potential future estate tax burdens that might arise from unfavorable shifts in the tax landscape.

Addressing Capital Gains with Charitable Remainder Trusts (CRTs)

In the realm of estate planning, addressing capital gains is a significant concern for individuals who have realized significant appreciation in their assets, particularly in highly valued stocks. One strategy that deserves attention is the implementation of Charitable Remainder Trusts (CRTs). This financial tool can be especially beneficial for those facing steep capital gains taxes from selling investments or property.

According to Strauss, when deploying a CRT, the asset owner transfers appreciated assets into the trust before selling them. This transfer results in multiple advantages:

  • Upon sale of the assets by the CRT, no immediate capital gains tax is incurred by the trust, allowing for full reinvestment.
  • The CRT then provides an annuity stream back to the original owner for a specified term or for life.
  • Taxes on the annuity payments are spread over the period they are received, offering tax deferral benefits.
  • Ultimately, the remaining assets in the CRT at the end of its term go to designated charities.

To ensure the efficacy of utilizing a CRT, it is essential to undertake diligent calculations to confirm whether the trust will indeed provide a greater financial benefit than the outright sale and payment of capital gains taxes. The analysis must precisely account for factors such as the tax deferral advantage, current capital gains tax rates, the term of the annuity, and projected income streams.

Qualified Charitable Distributions (QCDs): A Strategic Option for Retirement Accounts

As estate planning advisors consider the various tools at their disposal, QCDs stand out as a tactically advantageous option for clients who are philanthropically inclined and are also facing required minimum distributions (RMDs) from their retirement accounts.

Strauss explained how QCDs allow individuals over a certain age to divert their RMDs directly to a qualified charity. This mechanism offers key benefits:

  • The distributed amount is excluded from taxable income, thus potentially maintaining lower income tax brackets for the donor.
  • It circumvents the complex tax deductions process since the QCD doesn't require itemization.
  • By reducing taxable income, QCDs may help manage or reduce Medicare premium surcharges that are based on income levels.

Engaging in QCDs requires an understanding of the interplay between taxable income, Medicare premium brackets, and individual charitable goals. Successful incorporation of this technique can lead to optimized tax outcomes and meet charitable intentions simultaneously.

Proactive Estate Planning: A Call to Action

Through careful analysis of tools such as ILITs, SLATs, CRTs, and QCDs, estate planning can transcend beyond simple wealth transfer and instead become an intentional structure for wealth preservation, tax minimization, and philanthropic contribution.

Estate planning professionals must, therefore, continuously advocate for proactive engagement with their clients. The landscape of tax law is ever-changing and waiting until the last moment can result in missed opportunities and an inability to fully harness available strategies.

Navigating the Complexities of Estate Tax Laws

Estate tax laws are intricate and can present challenges for even the most financially savvy individuals. With evolving regulations and the potential for tax reform, it is critical to stay informed about how these changes can impact estate planning. Tax laws can significantly affect the division and distribution of an estate, and being aware of current laws is key to minimizing the tax burden on heirs.

Individuals who possess substantial assets need to be particularly aware of how federal and state estate taxes will affect their estate. Strategies such as the use of Irrevocable Life Insurance Trusts (ILITs) can be employed to provide liquidity for estate taxes, thus ensuring that valuable assets don't have to be sold off to cover tax bills. Similarly, Spousal Lifetime Access Trusts (SLATs) can offer married couples a way to take advantage of estate tax exemptions while providing financial support to a surviving spouse.

The Impact of Global Mobility on Estate Planning

In today’s globalized world, estate planning has become more complex due to the international presence of many investors. People who hold assets in multiple countries or who have beneficiaries residing abroad must navigate a web of international laws and tax treaties. Proper planning is essential to ensure that assets are protected from overseas taxes and that the distribution of wealth is conducted in a tax-efficient manner.

Cross-border estate planning requires a specialized understanding of the varying inheritance laws and taxation systems at play. Professional advice is crucial for those who find themselves in such a position, as it can help mitigate double taxation scenarios and address concerns related to domicile versus residency status.

Ongoing Client Engagement and Education in Estate Planning

In order to ensure that clients are making the best possible decisions for their legacy and heirs, continual client engagement and education is paramount. Estate planning is not a one-time event but an ongoing process that must adapt to life changes, such as marriage, the birth of children, or the acquisition of significant assets. Advisors play a pivotal role in guiding their clients through these life stages with sound estate planning advice.

Estate planning education should cover the potential benefits and implications of various trusts and instruments. Additionally, clients must be kept abreast of legislative changes that could influence their strategies. By offering seminars, newsletters, or individual consultations, estate planning professionals can help clients understand complex concepts and the importance of timely action, fostering informed decisions and a collaborative approach.

Final Remarks

In conclusion, estate planning is a proactive and dynamic process that requires timely action. With the right guidance and a robust plan, individuals can maximize their wealth preservation, support charitable causes, and ensure that their estate is passed on according to their wishes. Proactive planning ahead of the 2024 elections is advised given the potential changes to Congress along with the sunsetting of Trump’s tax cuts next year in 2025.

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Advisory services offered through Financial Sense® Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. DBA Financial Sense® Wealth Management. This material has been provided for informational purposes only. Financial Sense does not provide tax or legal advice and this is not intended as such. Clients or prospects should consult with their own tax and or legal advisors to determine the potential benefits, burdens and other consequences of engaging in a particular strategy.