Strategic Estate Planning: Preparing for Change

As we approach the end of 2024, advisors must guide clients through the intricacies of tax and estate planning strategies, taking advantage of current economic opportunities while preparing for potential shifts based on political developments. This involves leveraging today’s favorable conditions, especially in light of this week’s Presidential election, which could significantly alter the estate planning landscape. Let’s explore how to craft strategic plans that will allow clients to navigate these complexities and ensure long-term success.

Leverage Low Interest Rates for Wealth Transfer 

The Federal Reserve’s decision to (finally) start cutting interest rates has created an advantageous environment for wealth transfer strategies. Lower interest rates make grantor retained annuity trusts (GRATs), intra-family loans, and charitable lead trusts especially appealing, as they allow clients to pass future asset appreciation to heirs with minimal tax consequences. This is particularly beneficial for high-net-worth individuals who own privately held businesses. With valuation discounts for lack of control and marketability, clients can transfer business interests at a significantly lower taxable value, securing tax-efficient transfers. 

Smart advisors are urging clients to take immediate action, locking in these favorable valuations while rates are low. By initiating wealth transfer strategies now, clients can reduce their taxable estates and minimize the impact of any future tax hikes. This is particularly effective for assets expected to appreciate, such as shares in a family business or investment real estate, where future gains can be moved out of the client’s estate while currently undervalued. Acting promptly ensures that clients can leverage these economic conditions before potential changes, such as rate increases or political adjustments, disrupt the current framework.

Avoid Last-Minute Mistakes

With the end of the year fast approaching, estate planning shouldn’t be left to the last minute. The key is early action, and advisors should be guiding clients to strategize now, maximizing annual gift exclusions, considering larger lifetime exemption gifts, and strategically deploying charitable contributions. For clients holding privately held business interests, transferring these appreciating assets today allows them to benefit from discounts for lack of control and marketability, significantly lowering taxable values. 

Year-end planning should be comprehensive, including detailed evaluations of client portfolios, potential tax liabilities, and strategic opportunities. By proactively managing these elements, clients can avoid the pitfalls of rushed, last-minute decisions. This approach also allows for the incorporation of advanced planning tools like family limited partnerships (FLPs) and GRATs, which can provide significant tax advantages when executed thoughtfully. An early, proactive approach ensures that estate plans are not only efficient but also flexible, allowing clients to make adjustments as political or economic landscapes change.

Decision Point: Election-Driven Tax Policy Changes

Vice President Kamala Harris and former President Donald Trump promise dramatically different approaches to tax policy. Harris has proposed sweeping reforms aimed at wealth equity, including the introduction of a wealth tax on unrealized gains. This policy would target high-net-worth individuals and closely held businesses, taxing the appreciation of assets even if they have not been sold. Such a tax would have broad implications for estate planning, potentially increasing the tax burden on appreciating assets like stocks, real estate, and business interests. The aforementioned Supreme Court decision in Moore v. United States further strengthens the legal foundation for such measures, reaffirming Congress’s authority to tax undistributed income. This ruling could pave the way for Harris’s proposals to gain traction, significantly impacting how advisors approach wealth transfer strategies.

Conversely, Trump’s plans to maintain or even expand today’s historically generous estate tax exemptions, continuing the policies established during his previous term (and set to sunset at the end of 2026). He favors preserving favorable conditions for wealth transfers, potentially raising the estate tax exemption to new heights. However, his proposals would need to pass through Congress, where fiscal constraints, including rising federal deficits, could limit the feasibility of sweeping tax cuts.

For clients, the message is clear: act now to take advantage of the existing exemptions. By being proactive rather than reactive, you can help clients minimize tax exposure by utilizing tools like GRATs, FLPs, and charitable trusts to lock in current valuations. This proactive approach is essential, regardless of the election’s outcome, as it maximizes tax-saving opportunities and builds in flexibility for future adjustments.

Maximizing the Estate Tax Exemption Before 2025

The estate tax exemption, currently set at $13.61 million per individual ($13.99 million effective January 1, 2025), is scheduled to decrease significantly starting in 2026 unless new legislation extends it. This presents a critical window for clients to make substantial transfers to heirs without triggering significant estate taxes. Advisors should prioritize early action, especially for clients who own privately held businesses that can benefit from valuation discounts for lack of control and marketability. Employing strategic tools such as GRATs, charitable lead trusts, and outright gifts can help clients efficiently transfer wealth while securing favorable tax treatment. By acting now, your clients can lock in today’s conditions, minimizing the risk of future tax liabilities and ensuring that more of their wealth is preserved for future generations.

Conclusion

Strategic estate planning is about more than just current tax laws; it’s about anticipating change and maintaining flexibility. Whether it’s leveraging low interest rates, preparing for political shifts, or maximizing today’s favorable exemptions, advisors who take a proactive approach can help clients navigate the complexities of estate planning with confidence. By preparing clients now, advisors ensure that wealth is efficiently transferred, preserved, and ready for whatever changes may arise.

Who wouldn’t vote for that?

Anthony Venette, CPA/ABV is a Senior Manager, Business Valuation & Advisory, DeJoy & Co., CPAs & Advisors in Rochester, New York. He provides business valuation and advisory services to corporate and individual clients of DeJoy. & Co. He advises corporate and individual clients on cash flow management, tax planning, and strategic estate and business valuation, bringing his expertise to optimize outcomes for clients navigating complex financial landscapes.