Financial advisors are helping their clients with estate plans and other issues in anticipation of the potential sunset of Tax Cuts and Jobs Act provisions.
This tax law, signed by President Donald Trump in 2017, created a number of tax benefits: It lowered tax rates, doubled standard deductions and increased the child-tax credit. It also increased clients’ estate planning options by doubling the federal estate tax exemption to about $14 million for couples after indexing for inflation (the figure was just over $11 million in 2017). With these provisions set to expire next year, starting on January 1, 2026, the estate tax exemption would revert to $7 million for couples. That is, unless Congress acts to keep some of the law in place.
The uncertainty has advisors working with clients to prepare for next year’s changes.
Advisors at Angeles Wealth Management, a firm in Santa Monica, Calif., said they began speaking to clients about the issue two years ago, according to managing director Rick Nott. They have been focusing on the estates of those clients who might end up paying more taxes because of the expiring provisions, he said.
“For folks who are on the cusp, we’re making sure we’re having a collaborative conversation with us, a tax advisor, and an estate planning attorney,” Nott said.
The firm segments the conversation with clients into two parts when it comes to the reduced estate tax exemption thresholds. The first talk is about the amount of money that the clients and their family will need to live on annually for the rest of their lives.
Then they can look at “everything above that,” he said. “Let’s assess with your team whether or not it makes sense to do some gifting outside of your estate.”
Jeremiah Barlow, an executive vice president and head of wealth solutions at Denver-based Mercer Advisors, has been cautioning clients about making any dramatic moves. “No one should be looking to build a plan right now or change their plan in anticipation [of the sunset],” he said. “They should have a plan and stick to it and make minimum adjustments based on the rules we’re in at the time.”
However, if an individual plans to sell their business or gift a portion of their estate to someone else, they should consider accelerating such moves ahead of the tax law expiration next year, he said.
Meanwhile, David Haughton, a senior corporate counsel at Wealth.com, a firm based in Phoenix, said that if clients are going to make a move to minimize their estate tax burden, not only will they need to do it now, but they cannot be timid.
“If you’re going to plan for it from an estate planning perspective, you have to do relatively drastic actions,” he said. “You have to gift to things like irrevocable trusts and get things out of your estate in really large lump sums, because in order to get the benefit of planning before sunset, you have to make millions of dollars in gifts.”
He echoed Barlow’s comments about not altering the overall financial plan, though he did suggest making sure that a plan has the ability to react to changing market conditions. “I’ve always been a big proponent of keeping things flexible [so] if the time comes that you need to implement changes ... you have the tools to be able to do it, because you put flexible provisions into your estate plan.”
Advisors should identify those clients who could be affected by the expiring tax law and open conversations with them, Haughton said, offering a holistic view so that neither the advisors nor their clients make any knee-jerk moves.
“We’ve seen this time and time again where people presumably plan for what they think is going to happen legislatively and it never comes to be and they have to unwind it,” he said.
Nott urged advisors to look not just at the estate plans but also at a client’s income, since parts of the law pertaining to that could be sunsetting as well.