The tight presidential race has sparked a surge in tax planning by the wealthy. The 2025 sunset of the estate tax exemption limit could have a big impact 84 trillion dollars expected to be transferred to younger generations and charities in the coming decades.
Many families – not just the very rich – are in trouble. If they do nothing and the estate exemption lapses, they risk owing more than $14 million in estate taxes when they die. On the other hand, if they give the maximum now and the estate tax provisions are extended, they can kick themselves for giving too much money when they shouldn't have.
What should be done?
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 question of which presidential candidate will occupy the White House next. It's more about who controls the House and Senate. If those entities remain separate, I don't expect much new legislation to be passed. But this is not the time for you or your customers to be complacent. Just don't rush into long-term planning decisions to beat an arbitrary deadline. Trying to reconcile estate planning decisions with 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 freaks. Just remember that good planning always stands the test of time. By laying a good foundation for your customers now, you can always fine-tune as needed. Isn't that better than trying to build the Great Wall of China from scratch?
This is a long rational view, of course. I can't remember the last time we had so many arguments about the estate tax exemption. I think that's because we've never had an actual reduction in the exemption measure, except in 2010, when it was temporarily phased out.
When I started in this business, the exemption was about $600,000, about $1.5 million in today's dollars. At that level, almost half of the 109,000 wealth tax returns filed had to pay wealth tax. But the current exemption is so high — $13.61 million for an individual ($27.22 million for a married couple) — that only about 0.2% of 2.8 million people who die every year will pay estate tax. That's why so many revenue-starved lawmakers and politicians have a bull's-eye on him.
Popular rhetoric suggests that the rich aren't paying their fair share of taxes, but in many cases, they already are. Treasury valuations for 2024 show that the top 1% will pay an average federal rate of 31.5% (including income, payroll and excise), significantly higher than any other income group. And that's before the federal estate factors in the 1%, plus additional state-level estate taxes on a dozen states.
Cynics would say, sure, the ultra-rich have a lot of tax liabilities, but they have the legal, accounting, and estate planning resources to “plan” their way out of most of those taxes—resources that most people don't have. others do not have them. That may be true on paper, but you'd be surprised how few ultra-wealthy people tap into those resources.
High net worth does not guarantee good planning
I just got off the phone with someone worth $100 million who has no estate or gift planning – zero! — and he's balking at paying a fee to do it. One thing I've seen throughout my career—in good times and bad—is that people who are very good at making a lot of money are often not very good at saving, protecting, and distributing it strategically. I think they are separate skill sets.
My partner and I are meeting this week with a $42 million self-made real estate entrepreneur who has two different C corporations that each own real estate. I don't know if he has hired qualified estate planners before, but he is facing a huge tax liability and it will take a lot of work to fix his situation while there is still time. Furthermore, he is 83 years old. So it's not like we can buy life insurance to create liquidity.
Many of you are very 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 that the biggest fear many wealthy people have is making irreversible 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 the availability of their funds if needed, while excluding the trust assets from the donor spouse's taxable gross estate. In the past, possessions were gone forever when gifts were given to children or family. Thanks to tools like SLATS, if your customer's family needs money, it's there.
Randy A. Fox, CFP, AEPis the founder ofTwo Hawks Family Office Services. He is a renowned wealth strategist, philanthropic estate planner, educator and speaker.