In an election year, estate planning can easily become a source of undue anxiety since a change of administration and control of Congress could lead to changes in the tax code.
The proposals from both Democrats and Republicans have led to concerned clients reaching out to us to ask if it's time to take action now. While proposed legislation does not warrant wholesale changes to estate plans, looming legislative changes, which we will discuss, may merit action.
Any proposal will live or die on support from legislators. Frankly, we don’t feel it is likely a divided Congress will enact major changes before the election. Neither party wants to hand the other a legislative victory, especially in a presidential election year. The top priority for most lawmakers right now is to focus on their own election campaigns, address national crises and avoid government shutdowns. Throughout our careers, we have never seen this environment produce the bipartisan cooperation necessary to enact major changes to tax laws.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Sunset of tax exemptions coming up fast
However, we still think it pays to consider how the candidates’ proposals would influence income and estate taxation. The current federal estate and gift tax lifetime exemption of $13.61 million is set to sunset on December 31, 2025, and the exemption will revert to $5 million adjusted for inflation from 2010, or likely around $7 million, something President Joe Biden supports, though he has decided not to pursue the Democratic nomination. Additionally, there are talks of increasing the top marginal income tax rate and taxing capital gains as ordinary income for high earners.
On the other side of the aisle, former President Donald Trump’s proposals include extending the gift/estate tax exemption and increasing income tax cuts. These proposals create a confusing tableau for individuals trying to plan their estates effectively.
Although post-election scenarios vary widely, the 2026 sunset of the current tax exemptions is on the horizon, and individuals should consider utilizing their available gift tax and estate tax exemptions now in case they are reduced. If clients are willing and able to utilize the current gift exemptions, now is the time. Do not wait until December 2025, as an eleventh-hour decision will not allow for proper consideration and planning and may not be enough time to get it done.
The gift exemption could be used by giving away cash, securities or even a home. The gift could be made to a trust for children so they don’t get immediate access or control and to protect the assets from third parties. One should consult a lawyer for advice about the trust terms and flexibility, which can vary widely, as well as the trustees and in which state to establish the trust.
Innovative insurance options in the works
In this environment of uncertainty, the insurance market has responded with innovative solutions to address the potential 2025 sunset of current estate tax provisions. Notably, a proposed new product would enable an individual to buy $5 million in survivorship life insurance with an option to double this amount without additional medical screening if the tax exemptions revert to lower amounts in 2026.
The reality is that even if the pendulum swings in one direction, it will eventually swing back. By leveraging strategic insurance products and keeping informed about tax law proposals, individuals can ensure that their estate planning strategies are robust and adaptable. As always, consulting with experienced professionals who can provide personalized advice based on the latest developments and individual circumstances is crucial.
Related Content
-
Stock Market Today: Dow Logs Longest Losing Streak Since AprilThe November Producer Price Index showed that inflation remains a tough beast to tame.
-
Why Uber Stock Is Volatile After GM's Cruise AnnouncementUber stock is swinging this week following news that General Motors is restructuring its Cruise unit. Here's what you need to know.
-
Three Possible Tax Impacts for Retirees Under TrumpHow might a second Trump term affect your tax bill in retirement — or the inheritance tax bill for your heirs? This pro has three predictions.
-
What to Know About Leverage and Bitcoin's Meteoric RiseLeverage in the financial world can lead to astonishing success or a crushing collapse. How are investors using leverage to invest in bitcoin?
-
How Do You Know When It's Time to Change Financial Advisers?Sometimes a breakup is for the best. Here's how to handle 'the talk' and make the switch to a new professional who's a better fit for you.
-
The Best Ways to Use Your Year-End Bonus (and the Worst)'National Lampoon's Christmas Vacation' shouldn't be anyone's go-to for financial advice, but it does remind us how not to spend a holiday bonus.
-
LLCs: Power Tools That Can Create Big ProblemsForming an LLC for your business might seem like a straightforward endeavor, but if you don't know exactly what you're doing, trouble could follow.
-
Never Talk About Money? For Women, That Can Spell DisasterHow can you plan for retirement when your husband holds the purse strings and talking about money is taboo? Help is at hand for this common problem for women.
-
How Combining Your Home Equity and IRA Can Supercharge Your RetirementWhile many retirees own an IRA and a home, very few are considering how they could work together in a plan for retirement income.
-
The Six Estate Planning Steps Every Blended Family Must TakeWhether your blended family is newly formed or fully fledged, use these six steps to review your estate plans now and lower the risk of conflict in the future.
