3 Actions to Protect Wealth Transfer Amid Tax Uncertainty

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The wave of wealth transfer is extremely important for financial professionals advising clients on their estate plan strategies. Research from Cerulli in its 2024 U.S. High-Net-Worth and Ultra-High-Net-Worth report shows nearly $124 trillion will be transferred from generation to generation by 2048. In 2025 alone, $2.5 trillion is expected to transfer.

Tax policy affecting wealth transfer is also important, as Congress and the president grapple with the looming sunset of many provisions of the Tax Cuts and Jobs Act (TCJA). For example, the federal estate tax exemption, which is $13.99 million per person ($27.98 million per married couple) could revert to what it was prior to the TCJA ($5 million per person/$10 million per married couple, indexed for inflation).

With the Trump administration suggesting a TCJA extension, few are expecting this provision to expire. However, any extension of the TCJA tax provision may be temporary because the proposed legislation will likely be passed in a special process known as budget reconciliation.

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So, given these realities, what are the key considerations to keep in mind for estate planning? Here are three ideas to think about in order to plan more confidently in today’s tax environment.

Focus on holistic estate planning

By emphasizing holistic estate planning strategies, financial professionals and other advisers will be more likely to help clients get in the right mindset to take action to enhance their financial security. Once near- and middle-term accumulation and income needs are assessed and optimized, the conversation is likely to evolve to wealth transfer, the primary focus of this piece, to the next generation or generations.

While taxes are an important aspect of wealth transfer, and minimizing erosion due to taxes is important to most clients, the more fundamental issues are to whom to transfer wealth, when and how.

If one does not have a written plan, contacting a qualified estate planning attorney is an important next step. In many cases, a will, trust, powers of attorney, healthcare powers of attorney and living wills are typical documents many clients need.
If there’s a written plan, take time to review and update to reflect any recent developments after the original plan, such as marriages, birth of children, birth of grandchildren, divorce, remarriage, start of a business or sale of a business, growth of a business, acquisition of land, vacation homes and so on. This process is important regardless of one’s net worth.

Focus on gifting

Lifetime gifting is as important in estate planning as bequests made after the client’s death. With a likely extension of the TCJA, clients with money to give can remain confident that they will have this option to shift wealth to the next generation. Not only can clients give away $13.99 million (or $27.98 million for married couples) exempt from estate tax, but they can also give away an annual exclusion gift of $19,000 per person and per recipient.

For example, let’s say we have a married couple, Dan and Martha, who are both 70 years old. They have a $10 million net worth and live comfortably on their pensions, Social Security and retirement plan distributions. They have two children, Bob and Sally. Dan and Martha can each give Bob and Sally $19,000. If they do, that amounts to $38,000 each or $76,000 in total.

By giving gifts, Dan and Martha shift that money to their children, who will benefit from any appreciation. Dan and Martha will be able to see how their wealth transfer makes an impact today in the lives of their children and their families. From a tax perspective, the money gifted and any growth on it will be outside Dan and Martha’s estate. The main point is that gifting is a valuable tool for everyone who has the capacity to use it.

Focus on flexibility

As higher-net-worth individuals are subject to federal estate tax or may be in the future, the gifts they make are often to irrevocable trusts that place the money outside their taxable estate. In some cases, the irrevocable trust may purchase life insurance to offset federal estate taxes and, where applicable, state death taxes and other death-related costs, such as income taxes.

Irrevocable gifting, while potentially beneficial from a tax standpoint, can be unsettling in a changing tax environment. In those situations, it is not only important to focus on the non-tax reasons for the trusts, but also emphasize that irrevocable does not necessarily mean inflexible.

Attorneys have many tools that can provide flexibility in planning, even with irrevocable trusts. One way to do this would be for the attorney to draft a provision to permit distributions to the non-grantor spouse.

Let’s say in the Dan and Martha example, instead of gifting outright, Dan decided to establish and fund an irrevocable trust for the ultimate benefit of Bob and Sally. The attorney could provide flexibility by adding Martha as a beneficiary of the trust and permitting the trustee to make distributions of principal and income to Martha.

(Note that individuals like Dan and Martha would need advice from their own attorney on implementing and managing this strategy. And this is not the only strategy or tool that could provide flexibility in this type of situation.)

Focusing on holistic planning, taking advantage of gifting and providing flexibility are key actions that clients can take to help secure their financial future — and their family’s.

Brett Berg is Vice President of Advanced Planning within the Individual Life Insurance business at Prudential Financial, Inc. He may be reached at brett.berg@prudential.com. 1085422-00001-00

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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With over 20 years of experience in estate and business planning, Brett is currently vice president of Advanced Planning within the Individual Life Insurance business at Prudential Financial, Inc. Prior to joining Prudential in 2011, Brett practiced law in private practice and held leadership positions in the advanced markets groups at other Fortune 100 insurance carriers. He is passionate about educating financial services professionals so they can help address clients’ more complex personal and business insurance needs.