Wealthy Americans Enhance Estate Plans to Preserve Wealth Amid Potential Tax Changes

Written by David J. Neuman, JD Tax & Legal Manager

As the upcoming elections approach, many wealthy Americans are consulting estate planners and financial advisors to determine the best course of action to protect their assets from potential changes in estate tax laws. Significant changes were made to the federal estate and gift tax system in 2017 with the enactment of the Tax Cuts and Jobs Act (TCJA). With the 2017 tax cuts scheduled to expire after 2025, there is growing concern about how estate tax thresholds might shift, particularly if the political landscape changes in favor of more progressive tax policies. This means that as of January 1, 2026, nearly all of the legislation’s changes to the tax-related provisions could revert to what they were before the TCJA was passed in 2017. For high-net-worth individuals, preparing for these changes now could mean significant savings in the future.

Current Estate Tax Landscape

The current lifetime estate tax exemption is $13.61 million per individual, which is set to increase to $13.99 million by 2025, allowing married couples to protect up to $27.98 million during their lives. However, if the 2017 tax cuts expire as planned, this threshold could be halved to approximately $7 million per person.

Utilizing Trusts and Lifetime Gifts

To mitigate the potential tax burden, many wealthy families are taking proactive steps to lock in the current exemption levels by utilizing lifetime gifts and setting up irrevocable trusts. These financial tools allow individuals to transfer significant wealth out of their estates while avoiding estate taxes on these amounts at the time of their death. However, the window to take advantage of these strategies is shrinking, as any changes in political leadership or tax policy could alter the estate tax landscape.

Benefits and Risks of Irrevocable Trusts

Irrevocable trusts are a popular method for high-net-worth individuals to shield assets from estate taxes. Once assets are placed in an irrevocable trust, they are no longer part of the individual’s estate and are, therefore, not subject to estate taxes. Grantor Retained Annuity Trusts (GRAT) are a type of irrevocable trust that serves the purpose of transferring assets away from the estate of the trust’s grantor while guaranteeing them a steady stream of income. The grantor then becomes eligible to receive a series of annuity payments for a certain number of years. The remaining assets are distributed to a remainder beneficiary. However, there are issues and risks associated with this strategy. The grantor must feel comfortable moving assets out of his or her control. Once assets are in the trust, no changes can be made unless all beneficiaries agree to changes or a court approves modifications. Additionally, capital gains taxes may apply to trust assets that would not apply to an outright inheritance.

Is It Necessary for Everyone?

While the potential tax savings of utilizing irrevocable trusts are significant, this strategy may not be necessary for everyone. For individuals with estates below the current $13.61 million combined gift and estate tax exemption, there might not be any benefits to using this strategy. Furthermore, future legislative changes remain uncertain.

Timing Your Estate Planning Decisions

For many, the decision to set up a trust or make large lifetime gifts hinges on the potential political outcome. Some estate planners suggest waiting until after the election results to make any final moves, but emphasize the importance of being prepared. Setting up these structures now can provide flexibility to finalize the transfer of assets later, depending on the post-election tax environment.

Beyond Taxes: Additional Reasons for Trusts

In recent years, more families have started using trusts not only to avoid estate taxes but also to protect their assets from other threats like creditors or divorce settlements. The ability to shield wealth from these risks while also taking advantage of the current estate tax exemption makes irrevocable trusts an appealing option for many.

Annual Tax-Free Gifts as an Alternative

In addition to using trusts, wealthy individuals can also consider making tax-free annual gifts to family members. For tax year 2024, individuals can give up to $18,000 per recipient without counting against their lifetime exemption or having the requirement to file gift tax returns. This strategy allows for the gradual transfer of wealth over time without triggering estate taxes. However, future proposals may seek to limit these tax-free gifts as well.

The Importance of Planning with LMC

Given the complexity of estate planning and the potential for significant financial impact, it’s essential for high-net-worth individuals to act strategically. LMC’s experienced professionals can help you navigate these uncertainties and ensure your wealth is protected. With tailored advice on trusts, and other tax-saving strategies, LMC provides the expert guidance you need to optimize your estate plan and secure your financial legacy.

LMC is dedicated to staying updated on these developments and advising clients effectively. For more information or questions, please reach out to your LMC professional.