As you consider whether to adjust your clients' estate plans ahead of the upcoming election, several key points should guide your conversations.
Firstly, it's crucial to emphasize that every client, regardless of their net worth or the election's outcome, needs a well-structured estate plan. Whether they are establishing a plan for the first time or revisiting an existing one, now is an opportune moment to ensure their plan avoids common pitfalls. Given the potential for changes in estate tax law, high-net-worth clients in particular should be proactive in reviewing and updating their strategies.
Should your clients modify their estate plans before the election? The Tax Policy Center estimates around 7,000 estates will owe federal estate taxes this year. However, next year could look vastly different. The number of taxable estates may triple—or even more—depending on possible changes to tax law. Understanding how these changes may impact your high-net-worth clients is critical for ensuring that their estate planning remains efficient and effective.
"Elections can significantly affect estate planning, especially in relation to federal tax policies," explains Theresa de Leon, EVP and national director of sales at Arden Trust Company. "Changes to federal estate tax exemptions, gift tax exemptions, and income tax laws could greatly influence the effectiveness of a client's estate plan."
Key considerations for advisors include staying informed on tax law proposals from both political parties. Democrats have previously proposed reducing the estate tax exemption to $3.5 million and gift exemptions to $1 million, while Republicans may push to extend the provisions of the Tax Cuts and Jobs Act (TCJA). Understanding these potential shifts allows you to provide clients with timely advice on strategies such as gifting or leveraging irrevocable trusts before year-end to lock in current exemptions.
The Tax Cuts and Jobs Act (TCJA) and Estate Exemption Impact The TCJA, enacted in 2017, had sweeping effects on the tax code, doubling the federal estate tax exemption to $11.18 million per person and $22.36 million per married couple, with inflation adjustments bringing the current exemption to $13.61 million per individual and $27.22 million per couple. However, unless Congress acts, these exemptions are set to revert to roughly $7.5 million per person in 2026.
"Republicans tend to favor extending the TCJA provisions, while Democrats have indicated a preference for lowering exemptions, particularly for higher earners," notes Alvina Lo, chief wealth strategist at Wilmington Trust. "For estate taxes, Democrats have proposed reducing the exemption significantly, down to $3.5 million."
Advisors should be ready to guide their clients through the potential tax landscape. For those anticipating a reduced estate tax exemption, one effective strategy is gifting. The IRS has clarified that gifts made under current exemptions will not be "clawed back" should the law change in the future. By making large gifts now, clients can take assets out of their estates before they appreciate significantly, thus potentially reducing future tax liabilities.
Leveraging Trusts in Estate Planning Trusts offer a flexible tool for navigating changes in estate tax law while providing numerous additional benefits. For many clients, setting up a Spousal Lifetime Access Trust (SLAT) or a Dynasty Trust could be a savvy move.
"A SLAT can offer significant flexibility as the spouse remains a permissible beneficiary, allowing clients to safeguard assets while maintaining access," Lo explains. "A Dynasty Trust can be structured to provide benefits for generations to come without incurring estate, gift, or generation-skipping transfer taxes."
Advisors should also consider the strategic use of Charitable Remainder Trusts (CRTs) to provide clients with immediate tax deductions, an ongoing income stream, and the opportunity to leave a legacy gift. Reviewing clients' life insurance coverage—often held in irrevocable life insurance trusts (ILITs)—is equally important, especially if changes in estate exemptions warrant adjustments to coverage levels.
Estate Planning for All Clients Even clients whose estates are not subject to federal estate taxes should have a comprehensive estate plan in place. At a minimum, every adult should have a will, powers of attorney, and advance directives. Advisors should counsel clients to review these documents at least every five years to account for changes in family composition, assets, or preferences for fiduciaries and agents.
"Estate planning is not a one-and-done task," emphasizes Jennifer Cona, managing partner at Cona Elder Law. "Life evolves, and so should legal documents. Regular reviews ensure that your clients’ plans continue to meet their goals and protect their loved ones."
In summary, as election cycles often bring tax uncertainty, this is a critical time to engage clients in estate planning conversations. Whether helping them protect substantial assets from potential tax hikes or simply ensuring their wishes are accurately reflected, advisors should be proactive, focusing on solutions that provide flexibility and safeguard wealth for future generations.
