Estate planning is a cornerstone of effective wealth management, ensuring the preservation and intentional transfer of assets. With President Donald Trump resuming office, potential policy shifts may significantly influence existing estate planning strategies.
While no definitive changes have been enacted, reflecting on the administration's previous policies and current proposals can guide proactive adjustments to estate plans.
Potential Changes to the Federal Estate Tax
A primary area of focus is the federal estate tax. The 2017 Tax Cuts and Jobs Act (TCJA), enacted during Trump's earlier term, elevated the estate tax exemption from approximately $5.5 million per individual to $11.18 million. Adjusted for inflation, this exemption is projected to reach $13.99 million in 2025.
Absent legislative intervention, this increased exemption is slated to sunset in 2026, reverting to pre-2018 levels, estimated around $7 million per individual. The current administration may advocate for extending the elevated exemption or abolishing the federal estate tax entirely. Such developments would necessitate high-net-worth individuals to reassess their estate plans, potentially shifting focus from tax-avoidance mechanisms, like certain trusts and gifting strategies, to broader wealth preservation tactics.
Strategic Considerations Amid Legislative Uncertainty
Given the uncertain trajectory of federal estate tax policies, continuous monitoring of legislative developments is crucial. Should the elevated exemption persist, simplifying complex tax-avoidance structures might be advisable. Conversely, if tax rates escalate, exploring gifting strategies or establishing irrevocable trusts before new laws take effect could be prudent.
Impact on Lifetime Gift and Estate Tax Exemptions
The interplay between lifetime gift and estate tax exemptions means changes to the estate tax directly influence gifting strategies. Under the TCJA, individuals could transfer substantial assets without incurring gift taxes. If the current administration maintains or enhances these exemptions, the urgency for gifting may diminish. However, a reduction in exemption levels, or a political shift favoring increased estate taxes, would prompt individuals to capitalize on current gifting allowances before new legislation is enacted.
Recommended Actions
To navigate potential changes, consider making substantial gifts now to utilize the current exemption levels. Additionally, leveraging the annual gift exclusion, set at $19,000 per recipient in 2025, can further mitigate future estate tax liabilities. Collaborating with an estate planning attorney to evaluate trust structures and gifting schedules is advisable.
Considerations Regarding the Step-Up in Basis Rule
The step-up in basis rule permits inherited assets to be valued at their fair market value upon the owner's death, potentially minimizing capital gains taxes for heirs. While no alterations to this policy occurred during Trump's first term, discussions about capital gains taxation may resurface. If the administration pursues capital gains tax reductions or maintains the step-up in basis, retaining appreciated assets could be advantageous. Alternatively, changes in capital gains taxation might necessitate proactive asset sales or restructuring.
Trusts in Estate Planning
Trusts, such as grantor retained annuity trusts (GRATs), irrevocable life insurance trusts (ILITs), and dynasty trusts, are integral to many estate plans. The relevance of these tools may fluctuate based on the administration's tax policies. Sustained high estate tax exemptions or reduced tax burdens could simplify estate plans. However, decreased exemptions or the introduction of restrictions on dynasty trusts may require more sophisticated strategies to protect generational wealth.
State-Level Estate and Inheritance Taxes
Beyond federal considerations, state-level estate and inheritance taxes are pivotal. Some states impose estate taxes with lower exemption thresholds than the federal government. Favorable federal estate tax laws might prompt wealth migration from states with high estate tax burdens. Reviewing state-specific estate tax laws and exploring relocation or other strategies to minimize state-level tax exposure is advisable.
Inherited Retirement Accounts
Changes in estate planning laws can also affect retirement account strategies. The SECURE Act of 2019 mandates most non-spouse beneficiaries to withdraw inherited retirement account funds within 10 years, potentially accelerating tax liabilities. Future reforms to retirement tax structures could influence estate distribution plans. Reviewing beneficiary designations, considering Roth conversions, and exploring charitable remainder trusts or other tax-efficient transfer tools are recommended.
In summary, the current administration's policies introduce new considerations for estate planning. Tax policy shifts, regulatory changes, and economic factors will all influence optimal strategies for wealth preservation and transfer. Engaging with estate planning professionals and staying informed about legislative developments is essential. By proactively adjusting estate plans in response to evolving policies, individuals and families can ensure their wealth is protected and distributed according to their wishes, irrespective of political changes.
