Clients with sufficient wealth to leave them exposed to future estate tax burdens need to understand that the time to act on the generous estate tax exemption established in 2017 by the Tax Cuts and Jobs Act is now — not when the expanded exemption sunsets the end of 2025.
In fact, according to Steve Lockshin, an experienced financial advisor and the founder of AdvicePeriod and Vanilla, it is already becoming more and more difficult to timely source the capabilities of specialist tax planning experts and estate attorneys who understand the rapidly evolving needs of high-net-worth and ultra-high-net-worth clients.
In a new interview with ThinkAdvisor, Lockshin warned in no uncertain terms that clients and advisors who fail to act now to prepare for the estate exemption sunset and other tax changes that are likely in the coming years are setting themselves up for failure. As Lockshin repeatedly emphasized, estate planning is a complicated and time-consuming process, and any given strategy can take years to fully implement.
This is true at the best of times, but history shows that big changes in tax laws always create estate planning logjams, and it is possible that advisors and their clients will simply not be able to source the legal expertise they need to create watertight estate plans in 2024 or 2025. It's happened before, Lockshin warned — for example, when big changes happened in the late 1980s and in the early 2010s — and it will happen again.
"So, with that fact in mind, if you look at the calendar and you consider how long the creation of a really solid estate planning approach can take, we are already in the crunch time," Lockshin said. "Simply put, now is the time for financial advisors with high-net-worth clients to look carefully at their estates and ascertain whether they will be taxable when the exemption sunsets — or if the estate might be taxable in the future based on projected values."
The good news, Lockshin said, is that advisors have a lot of places to go for support with this work, especially if they "get in the line early — like right now."
According to Lockshin, financial advisors with deep estate planning expertise are worth their weight in gold, especially for ultra-wealthy clients. At the same time, those advisors who lack personal expertise but who are able to bring in third-party resources to maximize the value of a client's estate will only deepen — not dilute — their firm's value proposition.
Disruption is Coming
As Lockshin recalled, the adoption in late 2017 of the Tax Cuts and Jobs Act delivered some of the most significant changes in federal tax law in some three decades. The act made sweeping changes for both individuals and corporations, and perhaps most important for advisors in the HNW and UHNW space, it doubled the amount of the federal estate and gift tax basic exclusion.
At that time, the exclusion amount for estate, gift and generation-skipping transfer tax purposes was increased from $5 million to $10 million, and it was indexed for cost-of-living adjustments starting from 2010. For people who pass away in 2023, the exemption amount will be nearly $13 million. For a married couple, that comes to a combined exemption of a little less than $26 million.
Critically, the increase in the exclusion only applies to estates of decedents dying after Dec. 31, 2017, and before Jan. 1, 2026, and to gifts made during that period. The provision sunsets in 2026, going back to $5 million per person, indexed for cost of living.
According to Lockshin, it is hard to overstate the importance of the 2026 sunset provisions when it comes to achieving optimal estate planning outcomes for clients. Put simply, clients have only about 2.5 more years to take full advantage of the doubled exemption.
As Lockshin emphasized, a given client doesn't need to die to take advantage of the historically generous exemptions. Rather, they simply need to enact some of the various strategies that can move their wealth out of their own estate — and ensure such strategies are appropriately documented and supported from a legal and regulatory standpoint.
"Again, advisors cannot assume that getting this done will be a quick and easy matter, even if the goals are well defined," Lockshin warned. "Depending on the complexity, estate planning actions of this nature can take multiple years to come to fruition."
