No matter what the Presidential candidates promise, like it or not, taxes are most likely heading higher at the end of next year. The national debt is $35 trillion and rising, key provisions of the Tax Cut and Jobs Act (TCJA) are sunsetting, and the US government is careening towards gridlock.
Put simply, to paraphrase a line from Animal House: Uncle Sam needs the dues.
Looking down the barrel of this coming tax wave, financial advisors are doing what they do best and that is plan ahead. To be sure, not all are making major moves right now since the election has yet to be decided – and it could take a while to pronounce a winner - but a good number are starting discussions with clients to protect their assets for what likely lies ahead.
A quick recap: The TCJA enacted by President Trump in 2017 increased the standard deduction and eliminated personal exemptions. It lowered marginal income tax rates across the scale. It imposed a $10,000 cap on the deductibility of state and local taxes (SALT). It increased the tax credit for each child under 17 from $1,000 to $2,000. It provided a 20 percent deduction for small businesses and also hiked the AMT exemption.
Oh yeah, and perhaps most importantly to ultra-high-net-worth wealth planners, it doubled the estate tax exemption to $28.6 million from $14.3 million for married couples.
Josh Strange, founder and president of Good Life NOVA, says he is keeping an eye on the political climate, but not making any “rash moves” in portfolios just yet.
That said, for some wealthier clients, he is talking more about annual gifting strategies, especially with the Trump-era gift and estate tax exemptions potentially ending at the conclusion of next year.
“Depending on what happens in the election, we will have discussions with clients about ways to maneuver around that possibility, including the use of irrevocable life insurance trusts (ILIT) and spousal lifetime access trusts (SLAT),” said Strange. “An ILIT enables individuals to transfer life insurance policies outside the taxable estate, while SLATs allow someone to transfer assets into a trust that benefits a spouse during their lifetime.”
Meanwhile, John Kirkland, director of trust compliance at American Trust Wealth, part of American TCS, believes clients better review their current estate planning situations sooner rather than later because wealth planning professionals are going to get busy.
“The window for engaging counsel, modifying current documents and executing changes may be shorter than currently perceived. The closer we get to the end of 2025 without indications of new legislation, the busier qualified practitioners will be taking care of clients,” said Kirkland.
He adds that clients can prepare for whatever happens in Washington by maximizing their gifting opportunities now to preserve their higher exemption amount. This can be accomplished through gifting up to the maximum annual gift tax exclusion amount, making direct payments to institutions to cover expenses like tuition or health expenses for children or grandchildren, and making gifts of cash, securities or other assets up to the larger annual exclusion amount now to preserve it before it drops considerably in 2026.
Similarly, Robin Petty, head of wealth strategy at NewEdge Wealth has been urging clients with sufficient assets to take advantage of the increased lifetime exemption amount by making gifts to remove assets and more importantly appreciation out of their taxable estates.
“The increased exemption amount is scheduled to sunset December 31, 2025. At that time, the lifetime exemption amount will revert to the 2017 amount indexed for inflation. This amount is expected to be between $7 million and $7.5 million,” said Petty.
For those who could have an estate tax concern if the TCJA sunsets, but don't have it now, a more cautious approach to gifting is likely more prudent, says David Haughton, senior corporate counsel at Wealth.com.
“While those clients could still get a lot of benefit from gifting large portions of the estate if it does sunset, the potential negative implications of taking such action and sunset ultimately not occurring promotes a more ‘wait-and-see’ approach to see where we are politically as we get closer to sunset,” said Haughton.
Meanwhile, Logan Specht, senior portfolio manager at American Trust Wealth, part of AmericanTCS, says he has not discussed the sunsetting of TCJA provisions with many clients, calling it “a bit premature” and the impacts “difficult to project.”
That said, he does warn that if the sunset occurs as currently scheduled, REIT dividends may no longer qualify for the 20 percent Qualified Business Income Deduction, thereby increasing the overall tax drag of REITs.
“Limiting exposure to REITs, along with the higher utilization rate of tax-exempt bonds, would be of consideration,” said Specht.
Along similar lines, Brian Large, partner at Lenox Advisors, says he plans to focus more on tax free assets like municipal bonds, because corporate bonds may “take a hit if their tax rates go up.”
Finally, Victor Orozco, LPL financial advisor and managing partner at Bair Financial Planning, says his team is evaluating the speed of his tax harvesting approach over the next two years.
“With rising individual rates, narrowing brackets, and capital gains taxes being relinked to ordinary income brackets – some households may face higher tax liabilities. Expediting gains before TCJA sunsetting and delaying the realization of the losses post-sunset may be the resulting actions in our portfolio management process,” said Orozco. “Ultimately, we are favoring harvesting timing over asset class tilting when it comes to TCJA expiring.”
When it comes to estate planning, he says the estate tax exemption adjusting from $14 million to $7 million has indeed caught the eyes of several families.
“We have had an increased number of conversations around Roth conversions, annual gifting, and Irrevocable Life Insurance Trusts (ILIT) to name a few strategies for this group which normally did not have taxable estate concerns on their radar,” said Orozco.
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