Size | E+ | Getty Images
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. Register to receive future editions, go straight to your inbox.
The tight presidential race has fueled a wave of tax planning by ultra-wealthy investors, largely due to fears of higher estate taxes, according to tax advisers and lawyers.
The scheduled “sunset” of the generous provision in the estate tax next year has taken on a new urgency as the odds of a divided government or a Democratic president have increased, tax experts said. Under current law, individuals can transfer up to $13.61 million (and couples can send up to $27.22 million) to family members or heirs without owing any estate or gift taxes.
The benefit is scheduled to expire at the end of 2025 along with other individual provisions of the 2017 Tax Cuts and Jobs Act. When it expires, the estate and gift tax exemption will drop by about half. Individuals will only be able to gift about $6 million to $7 million, and that rises to $12 million to $14 million for couples. Any assets transferred above this amount will be subject to a 40% transfer tax.
Wealth advisors and tax lawyers said the expectations of the Republican sweep in the first half of the year led many wealthy Americans to take a wait-and-see approach, since former President Donald Trump wants to extend the 2017 tax cuts for individuals.
Vice President Kamala Harris advocates higher taxes on those making more than $400,000.
With Harris and Trump essentially tied in the polls, the likelihood increases that the estate tax benefits will expire — either through gridlock or tax hikes.
“It’s getting faster now,” said Pam Lucina, chief fiduciary officer for Northern Trust and head of the trust and advisory practice. “Some people have stopped so far.”
The sunset of the exclusion, and the response of the rich, has a wide ripple effect on the inheritance and trillions of dollars are set to pass from the old to the young generation in the coming years. More than $84 trillion is expected to be transferred to younger generations in the coming decades, and the estate tax “cliff” is set to topple many of those gifts this year and next.
The biggest question facing wealthy families is how much, and when, before the estate tax changes. If they do nothing, and the estate exemption drops, they risk owing more than $14 million in estate taxes upon death. On the other hand, if they give away the maximum now, and the estate tax provisions are complete, they can wind up with “gifts’ remorse” – which comes when the donor gives away unnecessary money because of the fear of tax changes that never happened.
“With the remorse that gives, we want to make the client see different scenarios,” said Lucina. “Do they need a lifestyle change? If it’s an irrevocable gift, can they afford it?”
Counselors say clients should make gifting decisions driven by family dynamics and personalities as much as by taxes. While giving the maximum of $27.22 million may make sense now from a tax perspective, it may not necessarily from a family perspective.
“The first thing we do is separate the people who will give the gift from the people who have never done it and are only motivated to do it now because of the sunset,” said Mark Parthemer, head of wealth strategy and regional director. from Florida to Glenmede. “While it is also a once-in-a-lifetime opportunity in relation to the exemption, it is not the only thing. We want individuals to have peace of mind regardless of how it plays out.”
Parthemer said today’s wealthy parents and grandparents need to make sure they are psychologically comfortable making large gifts.
“They asked, ‘What if I lived longer, my money was bigger,'” Parthemer said. “We can do the math and figure out what we can figure out. But there’s also a psychological component. As people age, many of us become more concerned about financial independence, regardless of whether the math tells us we’re independent. or not.”
Some families also fear that their children are not ready for large amounts. Wealthy families who plan to make large gifts years from now are under pressure from tax changes to do so now.
“Especially with families with young children, the main concern is donor regret,” said Ann Bjerke, head of the continuation planning group at UBS.
Counselors say families can make gifts flexible — giving gifts to spouses first, for example, before giving to children. Or set up a trust that releases money over time and reduces the “sudden wealth syndrome” changes for children.
For families who plan to take advantage of the estate tax window, however, the time is now. It will take several months to design and submit the files. During the same tax cliff in 2010, so many families rushed to process gifts and set up trusts that lawyers became overwhelmed and many clients were stranded. Advisers say the prizewinners now face the same risk if they wait until after the election.
“We’ve seen some lawyers start turning away new clients,” Lucina said.
Another immediate risk is trouble with the IRS. Parthemer said the IRS recently reversed a strategy used by one couple, in which the husband used an exemption to give money to his children and gave the wife funds to regift using her own exemption.
“Both gifts are associated with wealthy couples, triggering gift tax,” he said. “You have to have time to measure twice and cut once, as they say.”
When tax advisors and lawyers say that wealthy clients also call them about other tax proposals in the campaign – from capital gains and corporate tax to taxing unrealized gains – Estate tax sunset is far and away the most pressing and likely to change.
“In the past month, inquiries have accelerated about (the estate exemption),” Bjerke said. “A lot of people are sitting on the sidelines waiting to implement wealth planning strategies. Now, more people are doing it.”
