Estate planning has become more urgent for rich people as the election nears. That's why tax laws need fixing, critics say.

Andrew Keshner

The future of estate taxes will be a flash point as the Trump tax cuts fade away

It's roughly a month ahead of the presidential election and rich Americans are thinking about their mortality, for tax purposes.

Estate-tax planning is a leading topic when wealth planners and tax experts discuss how their high-net-worth clients are trying to prep their finances for a presidential election with a lot at stake for taxes.

That's saying something, when former President Donald Trump and Vice President Kamala Harris are giving wealthy Americans so many questions about what to do with their money.

Among the questions financial advisers say they are fielding ahead of the election: Is it time to accelerate stock sales in light of Harris's call to hike the capital gains tax to 28% for millionaires? If higher taxes are coming, is it worth speeding up a conversion to an after-tax Roth IRA? Is it best to pause a home-buying decision to see if a more generous write-off comes through on local property taxes, as Trump has called for?

The advisers' replies are typically to wait and see, depending on a client's facts and circumstances. The professionals want to avoid hasty decisions when it's unclear who will be president and whether Republicans or Democrats will control Congress.

But there's a different tone when it comes to estate-planning.

That's "one of the few places where it might make sense to be a little more aggressive," said Dustin Stamper, a managing director in Grant Thornton's Washington National Tax Office. By contrast, "we are generally urging caution when it comes to pulling the trigger in investment and business decisions."

At Brown Brothers Harriman, principal Adrienne Penta is also telling clients to watch what develops in many instances. Still, she said, "the biggest opportunity, for many wealthy clients, is around estate-planning."

"There is a common theme of accelerated gifting," said Mark Baran, managing director of CBIZ's national tax office. The repeat message is this: "Now's the time to have conversations with your estate-planning advisers, and do it often."

The clock is ticking on current estate-tax rules

The current focus on estate-planning makes sense.

One part of Trump's 2017 Tax Cuts and Jobs Act doubled the threshold before estate taxes apply. For 2024, the lifetime gift and estate tax exemption is $13.61 million for individuals and $27.22 million for a married couple. The inflation-indexed threshold will likely climb higher next year.

Everyone has annual gift-tax exclusions that don't even count toward the lifetime exemption. It's $18,000 per recipient this year, the IRS says.

What's at issue are the sums beyond that point. So long as the combined amount to fund estates, trusts and direct gifts falls under the threshold, it avoids a 40% federal tax.

The problem is the 2026 threshold could tumble to 2017 levels, which are around $7 million for an individual, according to one estimate.

That's because estate-tax rules - like so many other provisions in the Tax Cuts and Jobs Act - will return to their 2017 form at the end of next year without congressional action.

The current rules have "helped affluent families pass along substantial gifts tax-free," Merrill Lynch noted in a recent explainer on estate taxes. "But the time for taking advantage of this benefit may be drawing short - it remains in effect only through the end of 2025."

Lawmakers are divided on a tax law that's 'irrelevant' for 99% of the country

Wealthy families' current focus on the estate tax is fodder for critics of the U.S. tax system and a preview of the fierce debate coming for taxes when the Trump tax cuts sunset.

The estate tax in its current state is "one of the most extreme examples of the way our tax code continues to privilege the extremely wealthy in our country," said Lindsay Owens, executive director of Groundwork Collaborative, a left-leaning think tank.

As the debate over the future of the tax law unfolds, her goal is to "seize the moment to vanquish the trickle-down tax code." There's public support to undo the higher estate-tax exemption, and among individual income-tax provisions, Owens said it's hard for her "to find something more objectionable."

Less than 0.1% of estates owed tax in 2018, down from 0.2% the year before the Trump tax cuts, according to the Institute on Taxation and Economic Policy, a left-leaning think tank. The report called the estate tax "irrelevant" to over 99% of the country.

If history is a guide, Republicans will not agree to a lower estate-tax exemption, said attorney Mary Burke Baker, who leads the tax policy practice at the law firm K&L Gates. But GOP lawmakers may need to weigh certain budgeting rules in that bid, she added.

Meanwhile, Democrats will seek a lower level because "it fits in their overall policy objective of making the wealthy pay their fair share," Baker said.

Here's one example of the divide: Many congressional Republicans support the "Death Tax Repeal Act." which would permanently erase the estate tax. They they see the estate tax as a punishment for success. While on the Democrats' progressive wing, the proposed "American Housing and Economic Mobility Act" would rewind the estate-tax exemption to 2009 levels to help pay for new housing and down-payment help for home buyers.

If exemptions fall lower, the IRS has said it will not claw back taxes on the prior gifts above the new level.

If one party controls the White House and another has Congress, Baker said there could be any mix of lower exemptions, new rules for certain trusts and the tax treatment of inherited assets. There's bipartisan support to protect family farms and businesses from estate-tax hits as they pass hands, she said.

Still, it could be a while before the terms of the deal become clear for estate taxes, and for all the other tax laws with uncertain futures. It's like contract talks, Baker explained: "You don't want to agree to any of the terms of the contract until you know what all the terms are."

"Every American should support President Trump in November because he is committed to extending the Trump-era tax cuts that led to more prosperity and lower taxes for all," said Taylor Rogers, a Republican National Committee spokesperson. A Harris presidency would be bad news for Americans' tax bills and their wallets, Rogers said.

Harris has said she will not increase taxes on people making less than $400,000, but says taxpayers above that point should be paying more. Her campaign did not respond to a request for comment.

Some wealthy taxpayers aren't waiting to find out how the election goes

The estate-planning push was already happening before the election. Creating trusts and gift strategies for valuable assets can be a complicated and emotionally weighty strategy.

It's time-consuming, and there's still more than a year to go. But when Harris turned it into a tight race after President Joe Biden dropped out, Peter Hughes of Evolve Investing said his clients wanted to prioritize the process.

"There were a lot of folks expecting a Trump presidency and thinking we didn't need to focus on this now. And now they are coming to me and asking, 'Should we be focused on this prior to year end?'" he said. His answer is not to rush anything like this. Still, Harris's rise has "just created a sense of urgency."

Don't dawdle either, according to Abbie Everist, a principal at BDO's national tax office specializing in estate planning.

"There is always uncertainty with elections," she said. "The potential presidential and congressional outcomes give a reason to strategically plan while professional resources are available to do in-depth analysis." Those resources inside firms could be tighter as new laws and regulations come from the next administration, Everist noted.

Whatever's next, Penta, who's also executive director of the Brown Brothers Harriman Center for Women & Wealth, isn't apologizing for making the most of the current rules "as they are legislatively provided for us."

"It's not our job to make the tax law, or our client's job," she said.

Her work is helping clients achieve their financial and life goals, like building generational wealth, philanthropy or business investment, she said. "There are a lot opportunities for families to consider, given the current tax structure."

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-Andrew Keshner

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10-05-24 0739ET

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