If you are considering changing your estate plan before the election, there are several factors to keep in mind. First, don't delay setting up an estate plan if you don't have one already; everyone should have a plan, regardless of the election outcome. Second, if your plan is gathering dust, this is a great time to update it and ensure you are avoiding the most common estate planning mistakes. Finally, potential estate tax law changes would likely affect the wealthy more than middle-class Americans.
Modify your estate plan before the election?
The Tax Policy Center predicts that around 7,000 returns will owe estate taxes this year. However, this could change dramatically next year. The center estimates the number of taxable estates could triple — or more — depending on potential tax law changes.
"Elections can significantly impact estate planning, especially in terms of federal tax laws," said Theresa de Leon, EVP and national director of sales at Arden Trust Company. "Adjustments to federal estate tax exemptions, gift tax exemptions, or income tax policies could drastically affect the effectiveness of an estate plan."
Here’s what to consider and whether it makes sense to adjust your estate plan based on the outcome of the election.
Tax Cuts and Jobs Act (TCJA) and Estate Exemption
The Tax Cuts and Jobs Act (TCJA), enacted in 2017, introduced sweeping changes to the U.S. tax code. It lowered individual and corporate tax rates and nearly doubled the standard deduction.
The TCJA also doubled the estate tax exemption to $11.18 million for individuals and $22.36 million for married couples. There were also adjustments for inflation. Currently, the exemption is $13.61 million per person and $27.22 million for married couples.
When the TCJA expires after 2025, the estate tax exemption is expected to decrease to $7.5 million per individual and $14.5 million for married couples, depending on the inflation adjustments. Estates exceeding these amounts will face tax rates starting at 18%, with a maximum rate of 40%.
But of course, if either the Democrats or Republicans take the presidency and Congress, they will be in a position to make changes to the law.
“Generally speaking, the Republicans would be in favor of extending the provisions of TJCA while the Democrats would favor the expiration of the tax cuts provisions, at least with respect to those making over $400,000,” said Alvina Lo, who is the chief wealth strategist at Wilmington Trust. “Specifically with respect to the estate tax exemptions, previous proposals from the Democrats have included lower exemption amounts of $3.5 million and $1 million.”
If you expect the exemption to be lowered, then one strategy is to make a large gift by the end of this year. The IRS has provided guidance that this would likely not be “clawed back” in terms of assessing future taxes.
Even if the gift is less than the exemption amount, it still may make sense to carry it out. This is if you expect the asset to accumulate substantial value in the future, such as a business interest. You will be able to take it out of your estate and avoid taxes.
These are complex decisions and should involve the help of qualified advisers. “Predicting election outcomes is inherently uncertain,” said Pam Lucina, president of The Northern Trust Institute. “Therefore, we advise individuals to prepare for all potential scenarios, including a single-party sweep or a divided government. This proactive approach allows for timely action once the election results are known.”
Setting up trusts
An effective way to deal with changes in estate taxes is with trusts. But there are other benefits. A trust can help manage assets, protect wealth and ensure beneficiaries are provided for.
“A lot of clients are considering a SLAT or a spousal lifetime access trust,” said Lo. “This is a trust that a grantor can create for his or her spouse and descendants. It could offer great flexibility as the spouse is a permissible beneficiary of the trust. Another is a dynasty trust whereby the trust may last in perpetuity. If structured and administered properly, the assets in the trust may benefit multiple generations to come without further estate, gift or generation-skipping tax.”
It’s common to use several types of trusts to allow for more benefits. “One option is a Charitable Remainder Trust,” said de Leon. “This allows an individual to take advantage of an immediate tax deduction while still providing income and ultimately establishing a legacy gift.”
In line with this, it’s also a good idea to review your life insurance. This is often used to fund future tax obligations. It’s usually held in an irrevocable trust, with the trust as the beneficiary. But if there are changes to the estate exemption, then there may need to be more coverage.
Estate planning for everyone
Even if you are not subject to the estate tax, it’s always recommended to put a plan in place. Estate planning is not just for the wealthy — having a solid plan ensures that your assets are distributed according to your wishes and that your family is cared for in case of unexpected events.
“All adults should have, at a minimum, a last will and testament and advance directives,” said Jennifer Cona, founder and managing partner at Cona Elder Law. “And estate plans are not one and done. Life circumstances change over time and so should your legal documents. Your estate plan should be reviewed at least every five years to ensure it continues to reflect your wishes, accommodates any changes in your family composition, and to confirm that your appointed fiduciaries and agents are still trusted individuals in your life.”
