As the dust settles from the 2024 election, significant changes are expected for tax and estate planning. For business owners, artists and art collectors, the evolving political and economic landscape requires proactive and flexible strategies to protect and grow wealth. Here's what you need to know to navigate this complex environment.
Political Displacement: 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 changes. This administration's agenda includes several income-targeting tax cuts and Social Security benefits, among other campaign promises. In particular, there is unspoken potential to expand provisions under the Tax Cuts and Jobs Act (TCJA) of 2017, which include the bonus wealth tax exemption and reduced tax rates imposed west of 2026, unless Congress acts.
While significant new taxes targeting the wealthy appear unlikely, uncertainty remains whether Trump and Congress will expend the political capital needed to make the 2017 laws permanent. Business owners and collectors should prepare for possible reductions in exemptions and changes in tax policies, particularly with respect to estate and gift taxes.
Planning for flexibility
We've been here before. In 2011, the Bush-era tax cuts were sunsetted, prompting many people to make irrevocable gifts in anticipation of the estate tax exemption being lowered to $1 million. However, Obama and Congress not only prevented the tax laws from being phased out, they made them permanent, leaving many regretting the irreversible transfers they made. The key takeaway from recent webinars and expert analysis is the importance of “planning in readiness.”
For those hesitant to make substantial gifts now, creating trusts without immediately funding them but maintaining the ability to fund these trusts quickly can provide the flexibility to act quickly if exemptions are reduced. For example, an irrevocable trust can be minimally funded now, with provisions in place to increase contributions later. Techniques as used worrisome adjustments (Wandry, TC Memo. 2012-88 allows clauses governing the funding of trusts based on external events, such as tax changes) in transfer documents may allow for last-minute asset transfers without appraisals, allowing individuals to maximize their exemptions before legislative deadlines.
Using 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 powerful solutions:
- GRATs enable the transfer of artwork or other valuable assets at reduced tax costs by retaining the proceeds for a period.
- CLTs and CRTs can create tax efficient strategies for those who wish to align their planning with philanthropic goals.
Art as an asset: unique considerations
Art and collections represent not only financial assets, but also deeply personal investments. To navigate the complexities of managing and transferring these assets:
- Hire specialist appraisers to ensure accurate valuations.
- Consider using trust funds or hybrid structures to maintain control over the disposition and use of collections.
- Evaluate sale options for purchase, fractional ownership or leasing arrangements to generate liquidity while maintaining the benefits of ownership.
Asset protection and income tax planning
With estate tax concerns likely to diminish 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 growth planning offer opportunities to optimize long-term tax results.
For example, business owners can explore opportunities to transfer business interests into trusts structured to maximize basis growth, ensuring efficient transfer of wealth to heirs while minimizing tax burden.
The importance of proactive communication
A consistent message from leading estate planners is the importance of engaging clients early. Advisors must 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 important regardless of tax policy changes. Regular communication with customers through newsletters, webinars or live consultations ensures that they stay informed and empowered to make timely decisions.
A new era of estate planning
The post-election environment presents 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: protect and grow wealth in an uncertain future.
As always, professional advice tailored to your specific circumstances is essential. Engaging with experts who understand the intricacies of your assets – whether a thriving business or a priceless art collection – can make all the difference in ensuring a prosperous legacy.