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A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future releases straight to your inbox.
The tightening of the presidential race has sparked a wave of tax planning by ultra-wealthy investors, especially because of fears of a higher estate tax, according to advisers and tax lawyers.
The planned “sunset” of a generous estate tax provision next year has taken on new urgency as the chances of a divided government or a Democratic president have grown, tax experts say. Under current law, individuals can transfer up to $13.61 million (and couples can send up to $27.22 million) to family members or beneficiaries without owing estate or gift taxes.
The benefit is scheduled to expire at the end of 2025 along with the other individual provisions of the Tax Cuts and Jobs Act of 2017. If it expires, the estate and gift tax exemption will be cut in about half. Individuals will only be able to donate about $6 million to $7 million, and that rises to $12 million to $14 million for couples. Any assets transferred above these amounts will be subject to a 40% transfer tax.
Wealth advisers and tax lawyers said expectations of a Republican sweep in the first half of the year have led many wealthy Americans to take a wait-and-see approach as former President Donald Trump looks to extend the 2017 personal tax cuts.
Vice President Kamala Harris has advocated higher taxes for those making more than $400,000.
With Harris and Trump virtually tied in the polls, the chances of property tax benefits expiring — either through gridlock or tax increases — have increased.
“There’s a little bit of increased urgency now,” said Pam Lucina, Northern Trust’s chief trustee and head of its trust and advisory practice. “Some were being held until now.”
The sunset of the exemption, and the response of the wealthy, has wide-ranging ripple effects on inheritances and the trillions of dollars that are set to pass from older to younger generations in the coming years. More than $84 trillion is expected to be passed down to younger generations in the coming decades, and the estate tax cliff is set to accelerate many of those gifts this year and next.
The biggest question facing wealthy families is how much to give and when, before any estate tax changes. If they do nothing and the estate exemption falls away, they risk owing more than $14 million in estate taxes if they die. On the other hand, if they give the maximum now and the estate tax provisions are extended, they could end up with “grudging” — which comes when donors gave money unnecessarily because of fears of tax changes that never happened.
“With donor remorse, we want to make sure clients are looking at the different scenarios,” Lucina said. “Will they need a lifestyle change? If it’s an irreversible gift, can they afford it?”
Advisers say clients should make sure their gifting decisions are informed by family dynamics and personalities as much as by taxes. While giving away the maximum of $27.22 million may make sense today from a tax perspective, it may not always make sense from a family perspective.
“The first thing we do is separate those people who were going to make the gift anyway from those who never did and are motivated to do so now because of the sunset,” said Mark Parthemer, head of wealth strategy and regional director. of Florida for Glenmede. “While it may be a once-in-a-lifetime opportunity as it relates to the exemption, it’s not the only thing. We want people to have peace of mind no matter how it turns out.”
Parthemer said today’s wealthy parents and grandparents need to make sure they feel comfortable making large gifts.
“They ask, ‘What if I live this long, will I outlive my money,'” Parthemer said. “We can do the math and figure out what makes sense. But there’s also a psychological element to it. As people get older, many of us worry more about our financial independence, whether the math tells us we’re independent or No”.
Some families may also fear that their children are not ready for such large amounts. Wealthy families who planned to make big gifts now are being pressured by the tax change to go ahead with it now.
“Especially with families with younger children, a primary concern is getting donor remorse,” said Ann Bjerke, head of UBS’s advanced planning group.
Advisers say families can structure their gifts to be flexible — gifting to a spouse first, for example, before going to the children. Or setting up trusts that channel the money over time and reduce the swings of “sudden wealth syndrome” for children.
However, for families planning to take advantage of the estate tax window, now is the time. Transfers can take months to draft and file. During a similar tax cliff in 2010, so many families rushed to process gifts and set up trusts that lawyers were overwhelmed and many clients were left stranded. Advisers say current donors face the same risk if they wait until after the election.
“We’re already seeing some lawyers starting to turn away new clients,” Lucina said.
Another danger with rushing is trouble with the IRS. Parthemer said the IRS recently uncovered a strategy used by a couple where the husband used his exemption to give money to his children and gave his wife funds to give again using her own exemption.
“Both gifts were attributed to the wealthy spouse, triggering a gift tax,” he said. “You have to have time to count twice and cut once, as they say.”
While consultants and tax lawyers said wealthy clients are also calling them about other tax proposals in the campaign — from higher capital gains and corporate taxes to taxing unrealized gains — the estate tax sunset is the most pressing and likely change.
“In the past month, investigations have been accelerated into the [estate exemption]Bjerke said. “Many people were sitting on the sidelines waiting to implement their wealth planning strategies. Now, more people are performing.”