Advisors serving high-net-worth clients likely know that the historically generous estate tax exemption established by the 2017 tax overhaul is on track to sunset at the end of 2025.
Under the law, 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 die 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.
This state of affairs is now more or less common knowledge among the advisor population serving high- and ultra-high-net-worth clients, explains Fiduciary Trust International's Scott Small.
What many advisors may not appreciate, Small says, is the hugely disruptive effect this sunset provision could have on wealthy Americans' legacy giving plans — and how the time to take action to prepare clients for this change is already upon us.
Small recently joined FTI as trust counsel in its Radnor, Pennsylvania, office, following a long-term stint at Wells Fargo, where he worked in both the wealth and investment management divisions as well as in the firm's private bank. According to Small, it is a particularly interesting (and busy) time to have taken on the new role.
Estate Exemption Cuts Incoming
As Small points out, the estate tax exemption has only been lowered once in recent history — back in 2010, when both the estate tax and exemption were effectively eliminated for one year due to a quirk in prior legislation from 2001. Despite that fact, Small says, a big reduction in the exemption seems increasingly likely, given the significant divisions in Congress and the "simple power of inertia."
"The estate tax exemption has effectively never been lowered," Small says, "but in my opinion that outcome seems increasingly likely, and it's going to have a big impact on clients when it happens."
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. As noted, this provision sunsets in 2026, meaning the exclusion will go back to $5 million per person, indexed for cost of living.
According to Small and others, 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 a little more than two years to take advantage of the doubled exemption.
What to Do Now
Crucially, a client doesn't need to die to take advantage of the historically generous exemptions. Rather, they simply need to enact some of the 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.
As Small explains, married clients with joint wealth of $10 million or below face a lot less uncertainty than those with wealth of $15 million and above. For couples (or individuals) with this degree of wealth, the next two years present a big opportunity to achieve tax-efficient giving, the likes of which may not present itself again in their lifetime.
"For those folks in that $15 million-plus area, they really should be starting to think about what kind of giving they may want to do now," Small says. "There are a lot of different tools they can lean on."
If the intention is to maintain the wealth within the family, there are many different types of trusts to lean on, some revocable and some irrevocable. Just a few to mention are spousal lifetime access trusts, irrevocable life insurance trusts and generation-skipping trusts, among many other options.
As Small explains, those with charitable intentions also have a lot of options, from charitable remainder unitrusts to charitable lead annuity trusts and charitable gift annuities. All of these are growing in popularity.
