The tightening presidential race has ignited a surge of tax planning by the affluent. The 2025 sunset of the estate tax exemption limit could greatly impact the $84 trillion expected to be transferred to younger generations and charities in the coming decades.
Many families—not just the ultra-wealthy—are in a quandary. If they do nothing and the estate exemption drops, they risk owing taxes on estates over $14 million when they die. On the other hand, if they give away the maximum now and the estate tax provisions are extended, they could be kicking themselves for giving away too much money when they didn’t have to.
What to Do?
After four decades in this business, I’ve learned one thing: there will always be uncertainty about future tax policy or other exogenous threats to people of means. If you think about it, it’s not even a matter of which presidential candidate inhabits the White House next. It’s more about who controls the House and the Senate. If those entities remain split, I don’t expect much new legislation to be passed. But this is no time for you or your clients to be complacent. Just don’t rush into long-term planning decisions to beat an arbitrary deadline. Trying to time estate-planning decisions to tax legislation is as foolish as trying to time the stock market.
That said, I’m all for anything that motivates people to take their estate planning more seriously. It reminds me of when people get a bad medical result and suddenly become health fanatics. Just remember that good planning always stands the test of time. By laying a good foundation for your clients now, you can always fine-tune as needed. Isn’t that better than trying to build the Great Wall of China from scratch?
That’s the rational long view, of course. I can’t remember the last time we had so much hand-wringing about the estate tax exemption. I think that’s because we’ve never had an actual decrease in the exemption amount except for 2010, when it was temporarily eliminated.
When I started in this business, the exemption was about $600,000, about $1.5 million in today’s dollars. At that level, nearly half of the 109,000 estate tax returns filed had to pay estate tax. But the current exemption is so high—$13.61 million per individual ($27.22 million for a married couple) -- only about 0.2% of the 2.8 million people dying annually will pay estate tax. That’s why so many revenue-starved legislators and politicians have a bull’s eye on it.
Popular rhetoric suggests that the wealthy aren’t paying their fair share of taxes, but in many cases, they already do. Treasury estimates for 2024 show the top 1% will pay an average federal rate of 31.5% (including income, payroll and excise), significantly higher than any other income cohort. And that’s before the federal estate affecting the top 1%, plus additional estate taxes at the state level in one dozen states.
Cynics would say, sure, the ultra-wealthy have plenty of tax obligations, but they have the legal, accounting and estate-planning resources to “plan” their way out of most of those taxes—resources that most other people don’t. That may be true on paper, but you’d be surprised at how few ultra-wealthy people use those resources.
High Net Worth Doesn’t Guarantee Good Planning
I just got off the phone with someone worth $100 million who has no estate or gift planning in place—zero!—and he’s balking at paying a fee to have it done. One thing I’ve seen throughout my career—in good times and bad—is that the people who are very good at making lots of money often aren’t very good at saving it, protecting it and distributing it strategically. I guess those are separate skill sets.
My partner and I are meeting this week with a self-made real estate entrepreneur worth $42 million who has two different C corporations that each own real estate. I don’t know if he hired qualified estate planners before, but he’s facing an enormous tax liability, and it’s going to be a ton of work to fix his situation while there’s still time. Further, he’s 83 years old. So, it’s not like we can buy life insurance to create liquidity.
Many of you are highly skilled at helping clients build their wealth. But how much “alpha” are you providing if you’re not helping them protect and distribute it on the back end?
When it comes to estate planning, I’ve found the biggest fear that many wealthy people have is about making irrevocable transfers. Don’t think of it as a one-way street. Thanks to the way many trusts work for married couples, they don’t have to worry about losing access to their money. Spousal lifetime access trusts (SLATs), for example, provide the beneficiary spouse with availability to their funds if needed while excluding the trust assets from the donor spouse’s gross taxable estate. In the past, the assets were gone for good when gifting to kids or family. Thanks to tools like SLATS, if your client’s family needs the money, it’s there.
Randy A. Fox, CFP, AEP is the founder of Two Hawks Family Office Services. He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker.
