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A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up To receive future editions delivered directly to your inbox.
The increasingly heated presidential race has sparked a wave of tax planning among ultra-wealthy investors, especially given concerns about higher estate taxes, advisers and tax attorneys say.
Tax experts say generous estate tax provisions slated to be eliminated next year have become more urgent as the likelihood of a split in the administration or a Democratic president grows. Under current law, an individual can transfer up to $13.61 million (and a couple can transfer up to $27.22 million) to a family member or beneficiary without paying estate or gift taxes.
The benefit program expires at the end of 2025, along with other individual provisions of the Tax Cuts and Jobs Act of 2017. If expired, the estate and gift tax exemptions would be reduced by approximately half. Individuals can only donate about $6 million to $7 million, while couples can donate up to $12 million to $14 million. Any transfer of assets above these amounts is subject to a 40% transfer tax.
Expectations of a Republican sweep in the first half of the year have led many wealthy Americans to take a wait-and-see approach as former President Trump looks to extend the 2017 personal tax cuts, wealth advisers and tax attorneys say.
Vice President Kamala Harris has advocated for higher taxes on those making more than $400,000 a year.
With Harris and Trump essentially tied in the polls, the likelihood of the estate tax break expiring — either through gridlock or a tax hike — increases.
“There’s an increased urgency now,” said Pam Lucina, chief fiduciary officer and head of fiduciary and advisory practices at Northern Trust. “Some people have been putting it off until now.”
The elimination of the exemption and the reaction of the wealthy will have a wide-ranging knock-on effect on estates, with trillions of dollars expected to be passed from older generations to younger ones in the coming years. More than $84 trillion is expected to be transferred to younger generations over the next few decades, and the estate tax “cliff” will accelerate many donations this year and next.
The biggest question facing wealthy families is how much and when to donate before estate taxes change. If they take no action and the estate exemption drops, they risk paying more than $14 million in estate taxes upon death. On the other hand, if they donate the maximum amount now and estate tax rules are extended, they may eventually experience “donor’s remorse” — when donors give away money unnecessarily out of fear of tax changes that never occur , this situation will occur.
“Given giver’s remorse, we want to make sure clients can consider different scenarios,” Lucina said. “Do they need to make lifestyle changes? If this is an irrevocable gift, can they afford it?”
Advisors say clients should make sure their gift decisions are influenced not just by taxes but also by family dynamics and personalities. While giving a cap of up to $27.22 million may make sense today from a tax perspective, it may not always make sense from a family perspective.
“The first thing we do is separate those who were planning to give gifts and those who never gave and are only now willing to give because the sun sets,” said Mark Parthemer, chief wealth strategist and regional director. “While this may be a once-in-a-lifetime opportunity as it relates to immunity, that’s not the only thing. We want individuals to have peace of mind, whatever the outcome. “
Today’s wealthy parents and grandparents need to make sure they feel psychologically comfortable giving big gifts, Parsemer said.
“They ask, ‘What if I live too long and all my money is gone?'” Passemer said. “We can do the math and figure out something that makes sense. But there’s a psychological component as well. As people get older, many of us will be more concerned about our financial independence, regardless of whether the math tells us we are independent or not. .
Some families may also worry that their children are not ready for such a large amount. Wealthy families who had planned to give large gifts in a few years are now feeling pressure from tax changes to go ahead and do so now.
“Especially for families with young children, the main concern is whether the donor will regret it,” said Ann Bjerke, head of UBS’s senior planning group.
Advisors say families can be flexible in structuring gifts — for example, giving to a spouse first and then to the children. Or you can set up a trust and slowly transfer the money over time to reduce the risk of your child’s “sudden wealth syndrome.”
However, for families planning to take advantage of the estate tax window, now is the time. Drafting and submitting transfer documents can take several months. During a similar tax cliff in 2010, many families rushed to process gifts and set up trusts, leaving attorneys overwhelmed and many clients stranded. Today’s gift-givers will face the same risks if they wait until after the election to give gifts, advisers say.
“We’ve seen some attorneys start turning away new clients,” Lucina said.
Another risk of rushing is trouble with the IRS. Parsemer said the IRS recently eliminated a tactic used by a couple in which the husband used his exemption to gift money to the children and gave the wife funds, allowing her to use her own exemption to gift the funds.
“Both gifts were attributed to the wealthy spouse, triggering gift taxes,” he said. “As they say, you need to have time to measure twice and cut once.”
While advisers and tax attorneys say their wealthy clients are also calling about other tax proposals in the race — from raising capital gains and corporate taxes to taxing unrealized gains — the estate tax sunset is far and away the most pressing and most pressing. There are changes that may occur.
“Inquiries about (estate exemptions) have accelerated over the past month,” Bjerke said. “A lot of people were waiting on the sidelines, waiting to implement their wealth planning strategies. Now, more people are executing on it.”
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