As the dust settles from the 2024 elections, significant changes loom for tax and estate planning. For business owners, artists, and art collectors, the evolving political and economic landscape necessitates proactive and flexible strategies to protect and grow wealth. Here’s what you need to know to navigate this complex environment.
The Political Shift: Implications for Estate and Tax Planning
The re-election of President Donald Trump and a Republican-led Congress has set the stage for potential tax policy shifts. This administration's agenda includes several tax cuts targeting social security income and tips, alongside other campaign promises. Notably, there’s an unspoken potential to extend provisions under the 2017 Tax Cuts and Jobs Act (TCJA), which includes the bonus estate tax exemption and reduced tax rates, set to sunset in 2026 unless Congress acts.
While significant new taxes targeting the wealthy appear unlikely, uncertainty remains about whether Trump and Congress will expend the political capital needed to make the 2017 laws permanent. Business owners and collectors should be prepared for possible reductions in exemptions and shifts in taxation policies, especially regarding estate and gift taxes.
Planning for Flexibility
We’ve been here before. In 2011, the Bush-era tax cuts were set to sunset, leading many to make irrevocable gifts in anticipation of the estate tax exemption dropping to $1 million. However, Obama and Congress not only prevented the tax laws from sunsetting but made them permanent, leaving many regretting the irrevocable transfers they made. The key takeaway from recent expert webinars and analyses is the importance of "standby planning."
For those hesitant to make substantial gifts now, setting up trusts without immediately funding them but retaining the ability to quickly fund these trusts can provide the flexibility to act swiftly if exemptions are reduced. For example, an irrevocable trust can be minimally funded now, with provisions in place to scale up contributions later. Techniques like using Wandry adjustments (Wandry, T.C. Memo. 2012-88 allows clauses that adjust the funding of trusts based on outside events, such as tax changes) in transfer documents can enable last-minute asset transfers without appraisals, allowing individuals to maximize their exemptions before legislative deadlines.
Leveraging Trust Structures for Artists and Collectors
Artists and collectors often face unique challenges in estate planning, including valuation issues, liquidity constraints, and legacy preservation. Specific trust structures, such as Grantor Retained Annuity Trusts (GRATs), Charitable Lead (CLT) and Remainder Trusts (CRT) offer robust solutions:
- GRATs allow for transferring artwork or other valuable assets at reduced tax costs while retaining income for a period.
- CLTs and CRT can create tax-efficient strategies for those wishing to align their planning with philanthropic goals.
Art as an Asset: Unique Considerations
Art and collectibles represent not only financial assets but also deeply personal investments. To navigate the complexities of managing and transferring these assets:
- Engage specialized appraisers to ensure accurate valuations.
- Consider using purpose trusts or hybrid structures to maintain control over the disposition and use of collections.
- Evaluate selling options to purchase, fractional ownership or leasing arrangements to generate liquidity while preserving ownership benefits.
Asset Protection and Income Tax Planning
With estate tax concerns potentially diminishing under the current administration, advisors recommend focusing on income tax planning and asset protection. Non-grantor trusts can reduce state income tax exposure, while Roth IRA conversions and basis step-up planning offer opportunities to optimize long-term tax outcomes.
For example, business owners might explore opportunities to transfer business interests into trusts structured to maximize the step-up in basis, ensuring efficient wealth transfer to heirs while minimizing tax burdens.
The Importance of Proactive Communication
One consistent message from leading estate planners is the importance of engaging clients early. Advisors should educate clients about the broader benefits of planning beyond estate tax savings. Asset protection, income tax efficiency, and legacy preservation are critical drivers that remain relevant regardless of tax policy changes. Regularly communicating with clients through newsletters, webinars, or direct consultations ensures they stay informed and empowered to make timely decisions.
A New Era of Estate Planning
The post-election environment presents both challenges and opportunities for business owners, artists, and collectors. Flexibility, foresight, and a willingness to embrace innovative strategies will be essential. Whether through standby trusts, creative asset structures, or targeted tax planning, the goal remains clear: to protect and enhance wealth in an uncertain future.
As always, professional advice tailored to your specific circumstances is crucial. Engaging with experts who understand the intricacies of your assets—be it a thriving business or a priceless art collection—can make all the difference in securing a prosperous legacy.
