As the new year begins, wealthy families are navigating a shifting landscape marked by a new presidential administration, the onset of tax season and economic uncertainty. Despite these challenges, wealth strategy experts highlight a few clear principles for trust and estate planning: Start transferring assets sooner rather than later, anticipate an extension of the 2017 tax cuts and estate tax exemptions through the end of 2025, and set aside concerns about wealth tax proposals for now.
“Giving away assets always makes sense — and the sooner you give them away, the better,” said Joshua Rubenstein, leader of the wealth practice at the Chicago-based law firm Katten Muchin Rosenman. He recommends this even though the federal estate tax exemption, which increases to $13,990,000 in 2025, is expected to be extended by President-elect Trump and the Republican-controlled Congress.
“For clients who are in that ultra-high-net-worth space or family office clients who exceed our federal estate tax exemption, it likely makes sense to continue moving forward with planned wealth transfer strategies — even if the exemptions are extended at their current levels, including increases for inflation,” said Liz Summers, director of wealth strategy and family wealth at New York-based Wealthspire Advisors. “They should really consider utilizing their exemptions and moving that appreciation out of their estate sooner rather than later.”
That view is echoed by Mark Parthemer, chief wealth strategist at Glenmede, a New York-based wealth management firm. “What we’re saying to clients is now is not the time to hit the brakes. If you’ve been going through planning in anticipation of the sunset [of the estate tax exemption], stay focused on it.” One of the key reasons to give away that money, Parthemer said, is that the exemption may only be extended for several years due to federal budgetary constraints, and then “clients are going to be in the same position they’re in right now.”
And even if the exemption sunsets at the end of 2025 and goes back to $7 million, Parthemer suggests a few steps.
“You can add a person to the account and then in late December just have that person withdraw it," he said. "You could establish a trust and lend money into the trust; and then if, late in December, you want to convert that into a gift, you forgive the loan. But if you don’t want that to become a gift, you have the trust repay you. That’s creating flexibility so you can be nimble, depending on what happens with Congress.”
Parthemer also recommends at the start of the year using annual exclusion gifts, which will soon rise to $19,000 and are excluded from the estate exemption. No limit exists on the number of recipients to whom a donor can give; thus, it’s a useful planning method for those who have grandchildren and seek to avoid the generation-skipping transfer tax.
In addition, certain tax proposals that would have affected family offices and UHNW investors — such as a wealth tax, higher taxes on trusts, targeting tax planning techniques like granting retained annuity trusts, and taxing unrealized capital gains — seem off the table for now, Parthemer said.
The rise of the DAF
In addition, estate planning experts foresee more people moving money into donor-advised funds (DAFs). Tightening the rules and regulations regarding such funds has been discussed in recent years, but not much change is expected in the current political environment. A big advantage that DAFs have over private foundations is that no minimum distribution is required.
“There’s a little bit less flexibility but more privacy,” Summers said. “They do seem to be becoming more and more popular by the year.”
Plenty of other nontransfer-tax reasons exist to engage in irrevocable-trust planning, she said. “A properly structured irrevocable trust can really provide a vehicle for managing the family wealth for multiple generations. It can provide a layer of protection from creditors, including divorcing spouses, and make sure that the family legacy really continues to benefit multiple generations. And it can also provide structure and guidance for younger family members as they learn how to become responsible stewards of the family wealth.”
If you already have a trust, Summers recommends reviewing the documents to ensure they still reflect the family’s goals, values and the current tax landscape.
Other questions to ask: Have we changed our state of residency? Are we still on good terms with the fiduciary? Have any of our beneficiaries experienced changed circumstances? Do we have state estate tax planning — to make sure, even if we’re no longer taxable at the federal level?
And finally, Summers said it’s key to make sure you have proper powers of appointment, which can enable a trust beneficiary to change the disposition of some portion or all of those trust assets.
“A lot of these trusts, especially for clients in our space, they're designed to last for a very long time," she said. "We know our kids really well. We might know our grandkids really well. But we don't yet know our great-great-grandkids. What if one of the great-grandkids is a social worker and the other is the next Steve Jobs? Their financial needs are very different, and there should be enough flexibility built into a trust to make changes.”
Related Reads:
> Step-up in basis, life insurance and trusts lead estate planning strategies | Crain Currency
> Biden’s tax plan sparks debate amid generational wealth transfer | Crain Currency