Wednesday, February 21, 2024
CEOWORLD magazine - Latest - CEO Insider - What Should High-Worth Individuals Do Before the Tax Cuts and Jobs Act Expires?

CEO Insider

What Should High-Worth Individuals Do Before the Tax Cuts and Jobs Act Expires?

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Tax planning is a crucial consideration for business owners. With the Tax Cuts and Jobs Act setting to expire in a few short years, now is a good time to rethink how it can impact you once tax season rolls around. One of the biggest benefits of TCJA is its change to estate tax exemptions. Sophisticated estate and tax planning strategies take time to develop and implement, however, so consider leveraging the following steps now. 

The Tax Cuts and Jobs Act (known as TCJA) has reformed the ways businesses and individuals pay taxes. Today, many of us are wondering how exactly the law is going to change and what that means for our estate and tax planning.

The law has had a particularly important impact on estate taxes. By doubling the estate tax exemption — $12.06 million per individual in 2022 and $12.92 million in 2023 — TCJA has drastically reduced the number of individuals and families at risk of having their financial legacy reduced by the estate tax.

However, the increase in the estate and generation-skipping transfer tax is scheduled to sunset, or revert, back to its pre-2018 amount of $5 million per person (indexed for inflation) on Jan. 1, 2026. And because sophisticated estate and tax planning can take time to develop and implement, the clock is ticking for high net worth individuals to take advantage of the current increased exemption amount.

For background, TCJA was enacted in late 2017 and represented the largest reform of the United States tax code since 1986. For many Americans, particularly higher-income families and closely held business owners, it lowered tax rates and created new deductions, allowing individuals to preserve more of their wealth. 

Now, as Americans are dealing with the fallout of the pandemic and global economic uncertainty, they might lose sight of the fact that many of TCJA’s provisions will expire at the end of 2025. Making educated decisions about estate planning to maximize the heightened estate tax exemption while it’s still available will be crucial in the next few years.

How Can High Net Worth Individuals Make the Most of TCJA Before It Expires?

When tax planning, many high net worth people wonder: How can I reduce my estate taxes? Knowing the impact of the Tax Cuts and Jobs Act is vitally important for business owners to be able to conduct their estate and tax planning effectively. Gifting and inheritance strategies should always be discussed in detail with your wealth management team because the most beneficial plan will depend on your financial and business goals and other myriad nonfinancial considerations.

As we experience the twilight of these tax changes, some strategies can aid estate planning after the Tax Cuts and Jobs Act:

  1. Think about lifetime giving.
    Choosing a lifetime giving option can set your permanent tax savings rate at 40% or more (when factoring in the ability to pass assets to multiple generations estate-tax-free). This is great for individuals who want to “lock in” the exemption.

    A spousal lifetime access trust (known as SLAT) is an irrevocable trust under which your spouse is a permitted beneficiary; it utilizes the estate tax exemption and maintains flexibility because it allows access to funds if needed for lifestyle or other expenses. Be aware, though: You’ll need to consider the financial consequences in the event of divorce or if your spouse were to predecease you (the donor).

  2. File an estate tax return.
    Since 2011, an individual can elect to add a deceased spouse’s unused estate tax exemption amount to their own and utilize it for lifetime gifting or at death. Prior to this, individuals generally had to plan so that each spouse’s estate was equal in order to maximize the estate tax exemption or face a permanent increase in transfer tax. Because the unused exemption is an actual dollar amount, it will not decrease when the sunset provision lowers the estate tax exemption.

    If you’re going to choose this option, it’s important to file Form 706 at the right time (generally within nine months of a taxpayer’s death or up to 15 months with an extension). If you’re afraid you might have missed this opportunity in the last few years, take note that the IRS recently issued an automatic extension to elect portability by the fifth anniversary of a spouse’s death.

  3. Modify existing trusts.
    One option is to utilize the generation-skipping transfer tax exemption by making changes to existing trusts now. Similar to the estate tax, the GST tax has its own exemption scheduled to sunset in 2026.

    Due to modern flexibility in many states’ laws, an irrevocable trust can often be modified or amended without court intervention. So, you should review these trusts with your wealth or tax planning advisors to determine if a trust modification and late allocation of the GST tax exemption would be beneficial. This planning option can be particularly attractive in times of depressed asset values, so it could provide you the opportunity to make the most of current market conditions.

Individuals will understandably have concerns about the shift away from TCJA and might worry that taking advantage of the higher estate tax exemption now could lead to increased liability later on or at the time of their death. Fortunately, the anti-clawback regulations issued in 2019 largely protect against this, and there are many strategies you can implement now to take advantage of TCJA provisions before they expire.

Written by Susan Jones.
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CEOWORLD magazine - Latest - CEO Insider - What Should High-Worth Individuals Do Before the Tax Cuts and Jobs Act Expires?
Susan Wofford Jones, J.D. , CFP®
Susan Wofford Jones, J.D. , CFP® is senior wealth manager at Plancorp, a full-service wealth management company serving families in 44 states. Susan is a licensed attorney and CFP who passionately provides wealth management services to all walks of life. Jones understands the many facets involved in creating a successful multi-generational family legacy and uses a forward-looking approach to help clients grow and preserve assets, reduce taxes, and realize both their financial and non-financial goals.

Susan Wofford Jones, J.D. , CFP® is an opinion columnist for the CEOWORLD magazine. Connect with her through LinkedIn.