Estate Planning: No Time Like Now

The election is over, and it was a sweep by the republicans. For many, this seems to mean lower taxes, including the continuation of beneficial estate tax laws. There has even been a discussion of estate tax repeal. However, if history tells us anything, tax laws and campaign promises often do not entirely reconcile. So, what will happen is anyone’s guess, even for those with educated guesses. However, what is not a guess is the estate planning opportunities that exist now.

The current estate tax laws, which were enacted during the first Trump administration, provide opportunities for high-net-worth families to pass significant assets gift and estate tax-free. Currently, the lifetime exemption from gift and estate tax is $13,610,000 per taxpayer. In 2025 the exemption is scheduled to increase by another $380,000. Then, at the end of 2025, the exemption is set to sunset and will revert to 2017 levels, which after inflation should be about $7,000,000. Although there has been talk about extending the laws that created the increased exemption amounts, there has also been talk about letting it expire (and talk about repeal). Therefore, planning in the next 13 months, when we know what the exemptions are, should be considered by many taxpayers.

So, who should really consider using the exemption now? A barrage of marketing from accounting firms, law firms, investment firms, and the media would make it appear that the answer is everyone. The result is creating a bit of a planning panic. Although the ultimate decision will take into account a number of other factors (age, family situation, overall goals, etc.) we feel net worth can shine significant light on the question. Breaking the decision down to a  question of net worth, we suggest the following:

For those couples with net worths between $15,000,000 and $20,000,000, or less, utilizing the increased exemption is not advisable. Moving such a significant amount of assets from one’s own use or access is not financially reasonable. Yes, there is planning where the assets might still be accessible, however, that planning comes with specific restrictions and strings. In addition, even if the exemption amount does revert back,  a couple would have $14,000,000 or more of exemption available. That exemption should continue to grow by inflation and therefore could be as high as $20,000,000 in 15 years, which essentially would eliminate any estate tax exposure. Furthermore, even with a net worth slightly exceeding the exemption, there are other planning techniques available to reduce a future estate that might exceed the exemption.

On the other hand are those couples with net worths of $60,000,000 or more, where planning should seriously be considered. Taking advantage of the increased exemption can significantly reduce taxes and increase wealth transfer. Even if the exemption does get extended, just the power of compounding outside of the estate will be beneficial. In addition, even using $28,000,000 in exemption today will still leave a large future taxable estate. So, incorporating techniques, such as discount planning with family partnerships, can enhance planning even more. Implementing philanthropic planning and insurance planning could also be considered to further assist with the reduction and/or payment of estate taxes applicable to the estate not covered by current planning.

The decision might be the most difficult for couples with net worths between $20,000,000 and $40,000,000. On the one hand, they are wealthy enough that there is a large estate tax exposure and one that will seemingly only grow. On the other hand, carving off one-half or more of one’s net worth for the next generation might seem extreme or concerning as the couple may worry about needing it in the future. In these situations, incorporating flexibility in planning will be paramount. For example, there is planning, including the use of a spousal access trust, which can achieve the goal of removing assets from one’s estate while retaining access.

It is important to note that regardless of what your net worth might be, you should always make sure your “core” estate planning is in order. This includes your wills, revocable trusts, health care, and financial directives. Having these in order will set a solid foundation for any additional planning you might incorporate now or at a later point. Your Manchester advisor is here to help you consider these important decisions for you and your family. If you have any questions, reach out to start a conversation.

Disclosures

Manchester Capital Management published this article with permission from: Planning Advisory Services, LLC Naples, Florida ~ New York, New York ~ Santa Barbara, California 201.675.2225 | alexander.popovich@planning-advisory-services.com Planning Advisory Services, LLC, its employees, and affiliates does not provide legal, tax or investment management services.

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