Advisors Say Wealthy Americans Need a Plan as Election Set to Affect Estate Tax Policy

The outcome of this week’s U.S. presidential election could determine the fate of big changes coming to how wealthy Americans are able to pass on money to their heirs.

The Tax Cuts and Jobs Act (TCJA) of 2017—a federal law that increased the estate tax exemption—is set to expire at the end of next year. If that happens, the exemption limit could be cut in half depending on the incoming administration and how divided the Congress is.

While it’s uncertain what will happen to the TCJA and the estate tax exemption next year, experts recommend working with an estate planning lawyer and financial advisor now to see if giving away money this year or next is a good option. 

Why Election Matters To Estate Tax Exemption Limits

Currently, individuals can give away up to $13.61 million to their heirs without incurring any federal tax.That exemption limit will rise to nearly $14 million in 2025. Any amount in excess of those caps could be taxed at a rate of up to 40%. If the TCJA expires, that limit would revert to its pre-2017 level adjusted for inflation, or roughly $7 million.

“Most households aren’t close to that [$13.61 million cap] in terms of what they’ll have left over at the end of their lives, but wealthier households should get some tax advice on how to proceed,” said Christine Benz, a director of personal finance and retirement planning for Morningstar.

The TCJA was enacted during the prior tenure of former President and Republican candidate Donald Trump. The Trump campaign platform states that “Republicans will make permanent the provisions of the Trump Tax Cuts and Jobs Act,” and that includes the estate tax exemption limits.

Vice President and Democratic party candidate Kamala Harris’ platform also doesn’t expressly mention estate taxes but takes a different view on tax breaks for wealthy Americans. This “includes rolling back Trump’s tax cuts for the wealthiest Americans, enacting a billionaire minimum tax, quadrupling the tax on stock buybacks, and other reforms to ensure the very wealthy are playing by the same rules as the middle class.”

And that uncertainty, according to advisors, should prompt those who may be affected to seek advice now.

“Even if you’re in the $5 million or $6 million space, you could be facing an estate tax issue down the road,” said Dennis Huergo, Vice President at Wealth Enhancement Group.

Strategies To Employ Now To Reduce Taxable Estate

Even if the law changes and tax exclusion limits are lowered, Americans could still benefit from the older limits if the wealth transfer is executed in a certain manner and timed correctly.

“They [the IRS] are essentially giving clients the green light to make larger gifts now knowing that the exemption may fall in the next few years and providing reassurance that they [clients] will not be adversely affected or penalized for said transactions,” said Huergo.

Experts note that there are ways that people can reduce their taxable estate while still handing down money to their heirs, such as with the gift tax exclusion, which allows individuals to transfer, in 2024, up to $18,000 per person, to any number of people. This annual gift tax exemption doesn’t affect your lifetime exclusion amount.

People can also take advantage of exclusions for tuition and medical expenses, Brady suggests. With these exclusions, individuals or couples can pay tuition and medical expenses directly to educational institutions or insurance providers for dependents, kids, or grandkids.

“Those [exclusions] don’t count against the [estate tax] exemption… It also doesn’t count as using your annual gift exclusion,” said Kevin Brady, Vice President at Wealthspire Advisors.

And for those who want to assist a friend or family member with educational expenses in the future while reducing their own taxable estate, you could also try gifting a 529 plan to a beneficiary, according Cameron Valadez, a Partner and CFP, at Planable Wealth.

Huergo also advises some of his clients, who are on the cusp of the estate tax limits, on how to use estate freezing techniques to reduce their taxable estate. This involves ‘freezing’ the value of an appreciating asset and later transferring the tax liability to a beneficiary.

“In that situation, we would engage in some sort of estate freezing techniques where we put high growth assets outside of the estate,” said Huergo. “You’d still have access to whatever capital you need to make sure you have a full life while you’re still alive.”