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A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for the affluent investor and consumer. Register to receive future editions straight to your inbox.
The increasingly tight presidential race has triggered a wave of tax planning among ultra-wealthy investors, especially given fears of a higher estate tax, according to advisors and tax attorneys.
The planned “demise” of a generous estate tax provision next year has taken on new urgency as the chances of a divided government or a Democratic president have increased, tax experts say. Under current law, individuals can transfer up to $13.61 million (and couples can transfer up to $27.22 million) to family members or beneficiaries without incurring estate or gift taxes.
The benefit is expected to expire at the end of 2025, along with the other individual provisions of the Tax Cuts and Jobs Act 2017. When it expires, the inheritance and gift tax exemption will drop by approximately half. Individuals will only be able to donate about $6 million to $7 million, rising to $12 million to $14 million for couples. Transfer tax of 40% is levied on transferred assets in excess of these amounts.
Wealth advisers and tax lawyers said expectations of a Republican victory in the first half of the year led many wealthy Americans to take a wait-and-see approach as former President Donald Trump looks to extend the 2017 tax cuts for individuals.
Vice President Kamala Harris has advocated higher taxes for those making more than $400,000.
With Harris and Trump now nearly tied in the polls, it has become more likely that the estate tax will expire – either through deadlock or tax increases.
“There’s a little more urgency now,” said Pam Lucina, Northern Trust’s chief fiduciary officer and head of its trust and advisory practice. “Some people have been putting it off until now.”
The disappearance of the exemption and the reaction of the wealthy will have major implications for inheritances and the trillions of dollars that will pass from older to younger generations in the coming years. More than $84 trillion is expected to be transferred to younger generations over the coming decades, and the estate tax “cliff” will accelerate many of these gifts this year and next.
The biggest question wealthy families face is how much to give, and when, ahead of an estate tax change. If they do nothing and the estate exemption drops, they risk having to pay taxes on estates worth more than $14 million when they die. On the other hand, if they give away the most now and the estate tax is expanded, they could end up with “giver’s remorse” – which occurs when donors give away money unnecessarily for fear of tax changes that never happened.
“With givers’ remorse, we want to make sure customers look at the different scenarios,” Lucina said. “Will they need a lifestyle change? If it’s an irrevocable gift, can they afford it?”
Advisors say clients should make sure their gift decisions are driven as much by family dynamics and personalities as they are by taxes. While giving the maximum of $27.22 million may make sense from a tax perspective today, it may not always make sense from a family perspective.
“The first thing we do is separate the individuals who were going to make the gift anyway from those who have never done it and are now only motivated to do it now because of the sunset,” said Mark Parthemer, chief strategist and regional director. from Florida for Glenmede. “While it may be a unique opportunity when it comes to the waiver, it is not the only one. We want individuals to have peace of mind no matter how things play out.”
Parthemer said today’s wealthy parents and grandparents need to make sure they feel psychologically comfortable giving large gifts.
“They ask, ‘What if I live so long that I outlive my money?’” Parthemer said. “We can do the math and figure out what makes sense. But there is also a psychological component to it. As people get older, many of us become more concerned about our financial independence, regardless of whether the math tells us we are independent. or not.”
Some families may also be concerned that their children are not ready for such large amounts of money. Wealthy families who planned to make large donations in a few years are feeling the pressure of the tax change to go through with it now.
“Especially for families with younger children, a primary concern is donor remorse,” says Ann Bjerke, head of the advanced planning group at UBS.
Advisors say families can structure their gifts to be flexible: give to the spouse first before going to the children. Or setting up trusts that trickle down the money over time and reduce the changes of sudden wealth syndrome for children.
However, for families planning to take advantage of the estate tax, now is the time. Transfers can take months to prepare and submit. During a similar tax cliff in 2010, so many families rushed to process donations and set up trusts that attorneys became overwhelmed and many clients were left stranded. Advisers say today’s donors face the same risk if they wait until after the election.
“We are already seeing some lawyers starting to turn away new clients,” says Lucina.
Another risk of rushing is trouble with the IRS. Parthemer said the IRS recently reversed a strategy used by a couple in which the husband used his exemption to gift money to his children and gave his wife money to regift using her own exemption.
“Both gifts were attributed to the wealthy spouse, creating a gift tax,” he said. “You have to have time to measure twice and cut once, as they say.”
While advisors and tax lawyers said their wealthy clients are also calling them about other tax proposals in the campaign — from higher capital gains and corporate taxes to taxing unrealized gains — the estate tax sunset is by far the most urgent and likely change.
“In the past month, questions about the issue have accelerated [estate exemption]Bjerke said. “Many people were sitting on the sidelines waiting for their estate planning strategies to be implemented. Now more and more people are being executed.”