Election day is fast approaching, and with it comes the potential for meaningful changes in our political landscape. While we won’t know the election outcome until November, those with a high net worth (in this case, I’m referring to couples with a net worth approaching $20 million or greater or individuals approaching $10 million or greater) would be wise to start evaluating their current estate plans now.  

2024/2025 could be looked at in hindsight as the end of a golden era in estate planning. We currently enjoy historically high estate and gift exemptions, and certain key estate planning techniques are still viable. These combine to create an ideal environment for the transfer of wealth to future generations in an extremely tax-favorable manner. A change in our political climate post-election could lead to a less favorable environment with respect to estate tax laws. Regardless of what happens in the election, the current favorable estate and gift tax exemption amounts are scheduled to be cut in half when they “sunset” on January 1, 2026. So, there is no time like the present to consider all your options.  

The Estate & Gift Tax Laws – a Refresher on Where we are Now and Where We’ve Been 

Currently, the federal estate and gift tax laws in our country work in tandem, which means you have a certain dollar amount that you can transfer to your heirs either while alive or at your passing, tax-free. The exemption amount in 2024 is $13.61 million per individual. This is effectively $27.22 million for married couples, as portability allows a surviving spouse to use a deceased spouse’s unused exemption. You are free to gift away assets up to the exemption amount during your lifetime with no gift tax owed, but every dollar you gift away during life has the corresponding effect of decreasing the amount of assets you can leave to your heirs at death estate-tax-free, dollar for dollar.  

An important caveat to this is any gifts you make pursuant to the annual gift exclusion amount (currently $18,000 per individual, or $36,000 per couple, to any number of different beneficiaries per year) don’t count towards your lifetime gift exemption.  

For any assets that become subject to federal gift or estate tax, the current tax rate is 40%. This has fallen from 55% as recently as 2001. Without getting into the weeds, in addition to the estate and gift tax, there is also a generation-skipping transfer (GST) tax that is levied when transfers are made to someone two or more generations below (e.g., to grandkids or below). Right now, the GST exemption levels and tax rate mirror those already discussed for the estate and gift tax. 

You may be saying to yourself, “That seems like a really big exemption amount,” and you’d be right! To put how favorable the current exemption levels are in historical context, check out the following chart. 

As you can see, going back to 2001, exemption amounts used to be substantially smaller, and the tax rates used to be higher. Note that the exemption levels doubled in 2018 pursuant to the Tax Cuts and Jobs Act of 2017, but also understand that these higher levels are scheduled to “sunset” at the start of 2026 at which time they will automatically revert back to their prior levels (adjusted for inflation this is estimated to be around $7.0 million). However, if Congress and the next President agree to change them, these exemption reductions could be much larger and could happen prior to 1/1/2026 (though unlikely). 

2024 Election – Potential Impact on Estate Planning 

It’s obviously not my place to speak to the merits or validity of either political party’s policies, whether that’s regarding tax rates, estate laws, or anything else. That being said, as an advisor, it is my job to help clients understand what changes may be coming if the political climate turns and how they could be impacted personally.  

What a Divided Government Could Mean 

Given the current landscape of the Presidential race and those in the House and Senate, at this point, the most likely outcome could be divided government, meaning neither the Republicans nor the Democrats gain full control. If this happens, the odds of additional changes being made to the estate laws are pretty low. As such, in this scenario, the estate and gift exemption amounts would still be cut in half on January 1, 2026, as scheduled when they sunset, but otherwise, all current estate planning techniques and strategies are likely to remain viable. 

What a Trump Presidency / Republican-Controlled Congress Could Mean 

For those hoping to minimize their estate and gift tax exposure, this would no doubt be the best-case result. In this scenario, it’s possible the Republicans could try to extend the current larger estate and gift tax exemption amounts beyond the 1-1-26 sunset date. It is also expected that all current estate planning techniques and strategies will remain viable in this environment. 

What a Harris Presidency / Democratic-Controlled Congress Could Mean 

Conversely, for those concerned about potential estate and gift tax exposure, this would no doubt be the worst-case result. While our current understanding of what changes a Harris administration would seek to make to the estate rules is somewhat limited, we can certainly make some educated guesses based on what the Biden administration sought to achieve back in 2021 when the Democrats had full control at that time. Below are a few of the changes that were proposed (though never passed) back in 2021 by the House Ways and Means Committee when they were trying to fund the Build Back Better Act.  

Accelerated Sunset / Reduction of the Estate / GST and Gift Tax Exemption  

As previously mentioned, the current estate exemption amount is scheduled to be cut in half on January 1, 2026. It’s possible (though unlikely) that the Democrats could try to accelerate this sunset date to an earlier date in 2025. Though not proposed back in 2021, it’s certainly also possible that a Harris administration could seek to lower the estate exemption to an amount even lower than the scheduled sunset amount (e.g., to $3.5 million instead of $7.0 million). 

Valuation of “Non-Business Assets”  

It’s currently common when transferring an interest in a closely held business for estate purposes to discount the value based on a lack of control and a lack of marketability. This approach may still be available for interests in operating (active) businesses, but potentially not for family entities funded with marketable securities (passive assets). In 2021, this change was proposed to apply to transfers made on or after the date a new law is passed. 

Restrictions on Grantor Trusts  

Much of the sophisticated planning done by estate attorneys to help clients minimize estate taxes has centered around the use of grantor trusts. These trusts allow you (the grantor) to transfer assets that are removed from your estate, while also allowing you to continue to pay the income taxes associated with the trust’s assets on behalf of the trust beneficiaries (without counting as a gift).  

The 2021 proposal had several provisions that would have effectively rendered any newly created grantor trusts useless for estate planning purposes. This would potentially impact (subject to future clarification) some of the most useful estate planning techniques commonly employed by estate planners, namely intentionally defective grantor trusts (IDGTs), grantor retained annuity trusts (GRATs), and spousal lifetime access trusts (SLATs), each of which is discussed in more detail below.  

Irrevocable Life Insurance Trusts (ILITs)  

ILITs are designed to ensure that a life insurance death benefit is not subject to estate tax and are typically structured as grantor trusts. Existing ILITs would be grandfathered, but the 2021 proposal suggested that future contributions to ILITs for purposes of paying insurance premiums could cause some of the death benefit to be included in the estate. This would be a major limitation on the usefulness of ILITs going forward if ever passed. 

A couple of other notable changes that were left out of the Democrats’ proposal back in 2021 but are likely to still come under consideration in the future include the following: 

• Increase in the Estate and Gift Tax Rates – The 2021 proposal left the estate and gift tax rates at 40%. It had been speculated that a return to the 45-55% range we’ve seen in the past 10-20 years was possible.  
• Change in the Basis Rules at Death – Under current law, your heirs will typically receive any assets you leave them upon your death with a “stepped-up basis”, meaning they get to hold those assets with a basis equal to their fair market value on the date of your death. At various times, factions in DC have floated the idea of eliminating the basis step up at death (meaning heirs would take a lower carryover basis instead) or, alternatively, the realization of capital gains at death (meaning the deceased individual’s estate would owe capital gains tax on appreciated assets at death). This could obviously be a major complication for your heirs if you hold assets with a large amount of appreciation. These changes were not included in the 2021 proposal but could resurface. 

Estate Moves High Net-Worth Families Could Consider Before the Sunset on 1-1-26 

Given the impending sunset of the current estate exemption amounts on 1-1-26, what estate updates should high net-worth families be considering now? Here are a few to consider: 

Outright Gifts  

If the estate and gift exemptions are reduced at the end of 2025, you could miss out on a great opportunity to pass a large amount of wealth free of tax. In order to lock in the use of the currently larger exemption this year or next, you’d need to be in a position to have at least one spouse transfer upwards of $13 million out of their estate. Even if you’re not comfortable gifting that full amount, gifting a lower amount would still be effective in removing that reduced amount and any future appreciation out of your estate. These types of outright gifts are commonly made to irrevocable trusts for the future benefit of your children and/or grandchildren. Treasury Regulations from 2019 indicate that transfers covered under an individual’s exemption in the year of transfer can’t be “clawed back” later at their death if the exemption has subsequently been reduced. 

SLATs

If the thought of transferring that amount of wealth outright makes you uneasy, talk to your estate attorney about a spousal limited access trust (SLAT). If structured correctly, SLATs can potentially allow for trust distributions of the transferred assets back to the transferor’s spouse during their lifetime. You wouldn’t go down this route if you expected to need the funds again in the future. But if there is some type of unexpected financial hardship down the road, it can be comforting to know that you have the ability to access the funds again (indirectly through your spouse) if needed. Obviously, the possibility of a future divorce or the premature death of the spouse beneficiary needs to be considered. 

Estate “Freeze” Techniques  

If you aren’t comfortable making a large outright gift, an estate freeze may be a better fit for you. A freeze transaction has the net effect of removing the future appreciation of an asset (above a predefined “hurdle” rate established by the government) from your estate. There are several different structures to accomplish this, some of which involve transferring assets to a trust in exchange for a promissory note equal to the fair market value of the assets sold. The transfer to the trust can be structured as either a sale or a gift, depending on whether you want to use up some exemption (and if so how much).  

Promissory Note 

The use of a promissory note can provide added flexibility. If the potential estate law changes discussed above seem more certain at a later date, it may be possible to “forgive” the note, which would then be treated as a completed gift and would use up some exemption. On the other hand, if you later decide you don’t want to part with the asset, the trust may be able to pay back the note “in kind” by transferring the asset back to you. 

IDGTs + GRATs 

Two of the more common freeze structures are IDGTs and GRATs (referenced above). Your estate attorney can highlight the key differences between each, and which might be a better fit for your situation. Both IDGTs and GRATs can be powerful tools under current law. These tools can also be leveraged even further if you have an asset to transfer whose value can be discounted when transferring for estate purposes (as discussed above).  

Start the Planning Process Now 

So, what does all of this mean to you? If your personal balance sheet is approaching the $20 million range or greater for couples ($10 million or greater for individuals), it means you should at least be reaching out to your estate attorney and other advisors now to discuss what impact these potential changes could have on your personal planning.  

If you are uncertain about what amount of assets you can transfer and still have enough left over to comfortably live on, we at Lutz Financial can do a cash flow analysis to help you better answer that question. From a timing perspective, keep in mind that high-level estate planning of this nature usually takes some time to complete (and your attorney will likely get harder to book as the sunset date approaches). If appraisals may be needed those take time as well, as can applying for a federal tax identification number for a newly formed trust. In addition, some strategies could involve moving assets between spouses and then needing some extra time to pass before subsequent gifts can be implemented.  

Whether you ultimately decide to make any estate updates before the sunset or not, it’s essential that you at least talk to your advisors and understand your options. And if the upcoming election results in the Democrats controlling the Presidency, House, and Senate, those worried about their estate tax exposure may want to further expedite the timing of any potential estate updates. 

IMPORTANT DISCLOSURE INFORMATION