Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Many of us can remember 1997, when the estate tax exemption was $600,000 and the maximum estate tax rate was 55%. Since then, of course, a lot has changed. Today, under the provisions of the 2017 Tax Cuts and Jobs Act (TCJA), estates with a value of up to $11.7 million are exempted from paying taxes on the transfer of wealth to the next generation, and the top rate has dropped to 40%. With the unlimited marital deduction, a surviving spouse in 2021 can accumulate an estate of as much as $23.4 million. For these reasons, The Tax Policy Center calculates that a mere 0.1% of the 2.7 million Americans expected to die in 2020 will have paid any estate taxes at all.
But as we know, change is on the horizon, in one way or another. The current exclusion limits are scheduled to expire in 2025, according to the terms of the TCJA, unless renewed by Congress. Further, if control of the House and Senate doesn’t change from its current constitution, such an extension is unlikely. In fact, if President Biden advances his announced tax program before the midterm elections, the House and Senate, both narrowly controlled by his party, will likely do everything possible to get the package passed and signed into law.
Another strike against the extension comes from the looming “payment due” notices that will be generated by the $4 trillion in stimulus spending passed by Congress and signed into law during the past 12 months. With all that debt to service, squeezing additional taxes from multimillion-dollar estates is more attractive to federal budgeteers than extending the current, relatively high exemption. And, according to the terms of the TCJA, if the extension is allowed to expire in 2025, the exclusion reverts to what it was prior to passage of the 2017 law: $5 million.
Those matters are on the minds of our HNW clients, and they are looking to us for guidance and recommendations. What are we telling them?
For starters, we need to be reminding them of their ability to accelerate gifting programs now, while the new, higher exemption is still the law of the land. Though related strategies such as grantor-retained annuity trusts (GRATS) and other grantor trusts may come under scrutiny as part of changes in tax law, these are viable means for HNW clients to facilitate and accelerate gifting under the currently more favorable climate, especially since the IRS has indicated they are not inclined to institute “clawback” provisions. We can greatly assist these efforts by helping clients differentiate their high- and low-cost basis assets, giving preference to the former in their gifting plans. Because low-basis assets still receive a step-up in basis to the fair market value at the grantor’s death, it is more advantageous to the heirs to receive such assets at the later date. However, we also need to keep an eye on any proposed legislation, in case lawmakers consider changes in the current step-up allowances.
For clients with strong philanthropic leanings, we need to be looking at how charitable lead annuity trusts (CLATs) can fit into their plans, especially now, while interest rates remain at historically low rates. Remind them about donor-advised funds (DAFs) in connection with their charitable giving strategies.
Urge clients to review all their estate planning documents, including wills, trusts, and beneficiary designations for life insurance, annuities, and retirement plans. For those with a high percentage of illiquid assets and estates of $3.5 million or more, suggest life insurance or other means to ensure adequate liquidity at death for paying any taxes or other transfer expenses that may come due.
Also, there has never been a better time to talk with our clients about Roth conversions. Paying taxes at current “discounted” rates may make more sense than continuing to defer and risking much higher tax burdens later. Especially with the loss of the “stretch IRA” as part of the TCJA, eliminating RMDs and converting future potential income from taxable to non-taxed can be valuable, not only for the current owner, but for potential inheritors, as well.
Our HNW clients, like all those whom we serve, look to us for timely guidance. Let’s make sure we are acting as trusted “scouts”: scanning the economic, financial, and tax landscape for potential challenges and opportunities and calling in the professionals when necessary for safeguarding our clients’ best interests.
Kimberly Foss, CFP®, CPWA®, CFT-I™ candidate, is president and founder of Empyrion Wealth Management, an RIA with offices in Roseville, CA, and New York City. Her book, Wealthy By Design, is a New York Times bestseller. She has been a commentator for NBC, ABC, Fox News and The Wall Street Journal. You can reach her at [email protected]
Read more articles by Kimberly Foss