As we approach the end of 2024, advisors must guide clients through the intricacies of tax and estate planning strategies. This means taking advantage of current economic opportunities while preparing for possible changes based on political developments. It also means taking advantage of today's favorable conditions, including the recent presidential election, which could significantly change the estate planning landscape. Let's explore how to design strategic plans that will allow clients to navigate these complexities and ensure long-term success.
Taking advantage of low interest rates
The Federal Reserve's decision to (finally) start cutting interest rates has created a favorable environment for wealth transfer strategies. Lower interest rates make grantor-held annuity trusts, intra-family loans and charitable trusts prime, as they allow clients to pass future asset appreciation to heirs with minimal tax consequences. This is especially useful for high net worth individuals who own private businesses. With valuation discount for lack of control and marketabilityclients can transfer business interests at a significantly lower taxable value, providing tax-efficient transfers.
Smart advisors are urging clients to take immediate action by locking in these favorable valuations while rates are low. By starting wealth transfer strategies now, clients can reduce their taxable wealth and minimize the impact of any future tax increases. This is particularly effective for assets that are expected to appreciate, such as shares in a family business or investment real estate, where future earnings may be displaced from the client's assets while they are currently undervalued. Acting promptly ensures that customers can take advantage of these economic conditions before potential changes, such as rate hikes or political adjustments, disrupt the current framework.
Avoid last minute mistakes
With the end of the year fast approaching, don't leave estate planning to the last minute. Early action is key, and advisors should guide clients to strategize now by maximizing annual gift exclusions, considering larger lifetime exclusion gifts, and strategically placing charitable contributions. The transfer of appreciating assets today allows clients with private business interests to take advantage of deductions for lack of control and marketability, significantly reducing taxable values.
Year-end planning should be comprehensive, including detailed assessments of client portfolios, potential tax liabilities and strategic opportunities. By proactively managing these elements, clients can avoid the pitfalls of hasty, last-minute decisions. This approach also allows the inclusion of advanced planning tools such as family limited companies and GRATs, which can provide significant tax advantages when executed carefully. An early, proactive approach ensures that ownership plans are not only efficient, but also flexible, allowing clients to make adjustments as political or economic landscapes change.
For customers, the message is clear: act now to take advantage of existing exemptions. By being proactive rather than reactive, you can help clients minimize tax exposure by using tools like GRATs, FLPs and charitable trusts to close current assessments. This proactive approach is essential, regardless of the outcome of the election, as it maximizes tax saving opportunities and creates flexibility for future adjustments.
Expectations for the Trump administration
President-elect Trump's administration will likely continue to advocate for policies that favor lower taxes and maintain, or even increase, historically generous estate tax exemptions. This would create favorable conditions for wealth transfer, although implementing any major tax cuts would still require congressional approval.
However, with federal deficits growing, there are limits to how far tax cuts can go without addressing fiscal concerns. Growing budget deficits pose a challenge, potentially limiting the scope of new exemptions or other tax-friendly initiatives. Whenever I speak with advisors, I urge them to take advantage of the current exemption levels while they last, focusing on the strategic endowment of private asset appreciation.
Tools such as GRATs, FLPs and charitable trusts can help clients lock in these benefits, transferring wealth efficiently and effectively. The key is to maintain flexibility in estate plans, allowing clients to adapt to any changes in legislative priorities or economic constraints. Planning ahead ensures that clients can maximize tax saving opportunities, even if the administration's ambitions face constraints due to budget pressures.
West estate tax exemption
The estate tax exemption, currently set at $13.61 million per individual ($13.99 million effective January 1, 2025), is slated to decrease significantly starting in 2026 unless new legislation extends it . This presents a critical window for clients to make significant transfers to heirs without incurring significant estate taxes. Advisers should prioritize early action, particularly for clients who own private businesses that may benefit from valuation discounts for lack of control and marketability. Using strategic tools such as GRATs, CLTs and outright gifts can help clients efficiently transfer wealth while securing favorable tax treatment. By acting now, your clients can close on today's terms, minimizing the risk of future tax liabilities and ensuring that more of their wealth is preserved for future generations.
Prepare Now
Strategic estate planning is about more than just current tax laws; it's about anticipating change and maintaining flexibility. Whether taking advantage of low interest rates, preparing for political shifts, or maximizing today's favorable exemptions, advisors who take a proactive approach can help clients confidently navigate the complexities of estate planning. By preparing clients now, advisors will ensure that their clients' wealth is transferred efficiently, preserved and ready for any changes that may occur.
Who wouldn't vote for that?
Anthony VenetteCPA/ABV, is a Senior Manager in Valuation and Business Advisory at DeJoy & Co., based in Rochester, NY.