With the generous lifetime estate and gift tax provisions set to sunset at the end of 2025, there’s less time than you think to help clients transfer assets out of their family estates. This type of planning takes time, and many of the estate planners, appraisers and other professionals you need are swamped, retired or simply not knowledgeable enough to help you.
Unless Congress intervenes, the lifetime estate and gift exemptions will revert to 2017 levels, adjusted for inflation. Many tax experts are expecting limits of around $6.5 million for individuals and $13 million for married couples—about half of what they are now. That means an estimated 2 million wealthy U.S. families could see their estates taxed at rates as high as 40% or more. As your mom always told you: “Don’t wait until the last minute.”
Successful families you work with must start thinking about moving assets out of their estates ASAP. They must also consider which jurisdiction they want their trust(s) settled, which assets they want to transfer and whether they’re planning to use discounting techniques by incorporating limited liability companies and/or partnerships to hold assets in their planning. Finally, these families must decide if they want to use their entire exemption or just part of it before the year-end 2025 deadline.
The Clock Is Ticking
Your clients usually have many different assets and lots of complexity in their lives. With a roughly 12-month planning window and two more tax seasons to distract clients before the estate exemption sunsets, we're getting a lot closer to Dec. 31, 25 than you might think.
Many techniques for transferring assets take time to execute. For instance, more and more families may be candidates for the “squeeze technique” in which you organize a series of assets inside a family LLC or family limited partnership. First, you must get a professional appraisal that may produce a significant discount for those assets. Then you must transfer the assets based on the discounted value. The squeeze is a valuable tax mitigation technique, but it can’t be accomplished quickly. Most appraisers’ phones are ringing off the hook, and many aren’t accepting new clients for three to six months out. Then you need estate-planning attorneys to execute the planning documents, and many are even busier than the appraisers. Finally, you need an accountant’s help to file a gift tax return. Most CPAs I know will tell you busy season has become an almost year-round event.
If your clients think they can wait until December of 2024—let alone 2025—to get their planning done in time, it’s not going to happen.
Analyze Client’s Situation
Before making any recommendations to clients, you need the right team in place to get this planning done correctly. The team will need time to do a complete estate analysis of the client’s situation. You don’t want your client to make a large transfer to an irrevocable trust if they’re depending on the income from those assets to live. There’s nothing more upsetting than seeing well-intentioned estate planning or gifting disrupt a client’s personal cash flow. I’ve seen this happen all too often when folks do last-minute planning and the tax tail ends up wagging the dog.
The need for better lifetime cashflow modeling was one of the main reasons we started our planning practice. We had many clients with large stacks of unsigned, unfunded trusts. They had no idea what their lives would look like if they made those irrevocable transfers. Many were literally frozen in their tracks because they had no clarity about the future.
Quarterbacking the Team
Estate and gift planning is a team sport. Your client is the quarterback, but you need to step up and be the head coach and make sure all the other specialists you’ve added to the team are working in concert and doing so in the client’s best interests.
If your clients haven’t started their planning by June of this year, they’re looking for trouble. Again, the planning doesn’t need to be finalized by June of 2024, but the first step should be set in motion. I recommend starting with a comprehensive plan for your clients so they fully understand their cash flow situation. You need to take the time to help clients think about their estate planning carefully. Most aren't equipped to do it by themselves because they don’t how much they really spend. As the old saying goes: “The guy who manages your money and helps you with your taxes is different than the guy who helps you transfer money out of your estate.”
If you don’t think you have the right expertise in-house to help your clients with their estate and gift planning, make sure you have the right advisors to help you. These issues are very complex, so you don’t want to wing it. Make sure this isn’t the first advanced planning rodeo for the advisors you enlist to help you. If you’re not 100% sure, ask them to show you examples of how they've helped other people work through these issues.
Be Proactive
We can only base our recommendations on what the law currently says. We have no control over what Congress does about the estate exemption to post-2025. That being said, we’re likely facing lower exemption limits and higher taxes, so there’s plenty of incentive to be proactive. Let’s say the federal lifetime gift and estate tax exemptions are reduced to roughly $6.5 million (individual) and $13 million (married couples), as many tax experts expect. An estimated 1% to 1.5% of the U.S. population – roughly 2 million households -- could see their estates taxed at a rate of 40% or more.
And then there are the successful 40- to 50-year-olds with say, $3 to $7 million in net worth and another two decades to work. That money will likely grow far beyond the exemption threshold by the time they reach the end of their wealth accumulation years. It’s often difficult for young, successful families to understand the importance of getting future growth out of their estate(s) at an early age. Showing them reasonable projections about the size and growth of their estates is part of our job.
The other reason not to procrastinate about estate and gift planning is that very few practitioners are qualified to do this kind of work. When the Tax Cuts and Jobs Act raised the gift and estate exemption in 2017, most of the attorneys who knew how to do high-net-worth planning were aging baby boomers. Seeing so much potential business legislated away from them, many retired or closed their practices without transferring their knowledge. The young attorneys coming up the ranks told themselves: “There's no work at the high end of the market so I'm not going to learn this stuff.” Now you have a chronic shortage of capable estate attorneys just when we need them the most. On top of the great wealth transfer, many of the dynasty trusts that were created in the early 1900s are coming to the end of their perpetuity status. All that money will be coming out of trust over the next five to 10 years. Many affluent families that have never had to do estate planning will have massive taxable estates they're unprepared for.
HNW Taxpayers Targeted
When I say the clock is ticking on over 2 million families, I’m not exaggerating. Everything always takes longer than expected to get it done right. Meanwhile, the Internal Revenue Service is staffing up like never before and really going after HNW taxpayers. There may not be anyone around to protect them. Transferring assets out of your client’s estate isn’t something to be taken lightly as these decisions often can’t be undone.
Randy A. Fox, CFP, AEP is the founder of Two Hawks Consulting LLC. He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker.