4 estate planning tax tips for rich clients before the 2026 sunset

June 26, 2023 6:39 PM

The end of 2025, when a generous estate and gift tax break for the wealthy is set to expire, seems far off — but those looking to take advantage may be in poor shape if they delay action.

"There's a lot of people who want to kick the can down the road and say, 'Well, why don't we wait until end of 2024, 2025 and see how things are looking?'" said Abbey Flaum, the managing director and family wealth strategist at Atlanta-based registered investment advisor Homrich Berg.

For individual Americans, currently it's possible to pass on up to a lifetime maximum of $12.92 million without paying tax, and that amount is doubled for married couples. At the beginning of 2026, those gift and estate tax exemption ceilings will be halved, falling back to their 2017 levels of around $5 million per individual, plus adjustments for inflation. In the meantime, the extra tax-free cushion could make a huge difference in the fortunes of families who can afford to build it by placing the exempt amounts into trusts.

But waiting until late 2025 could be a big mistake, Flaum said, given how estate planning lawyers and advisors will likely have their hands full by then helping lots of other wealthy procrastinators.

"Many people are setting up trusts right now. Really proactive clients that can afford to do so are making gifts right now."

Arizent, Financial Planning's parent company, said in its latest report on the great wealth transfer that several options exist for advisors and estate planning experts to help clients prepare for the sunset. Regardless of which one a client decides to use, there are big dollars at stake if the deadline is missed.

Estates in excess of the lifetime limits "face a 40% tax on the amount above the levels," the Arizent report said. "Also after the end of 2025, federal individual tax rates, now a top 37%, will rise to 39.6%."

Below are four tips, sourced from Arizent research and industry experts, for how advisors can help clients make use of the next 2.5 years so they can actually ride into that sunset.

Workplace procrastination. Old rich wealthy man

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Some action is better than none

It doesn't matter how wealthy someone is — sometimes human nature, and the tendency to put off important matters, gets the best of us.

"What makes tax sense versus what makes sense psychologically, for an individual, may not align," Flaum said. That's where advisors and estate planning specialists can help clients focus on meeting their goals.

Even with very wealthy clients who can afford to max out their exemptions now, some remain averse to relinquishing control over their wealth — even a relatively small portion of it, and even knowing it could set them and their family up for the long term.

"I've had a client who had $100 million, who hesitates to give away $13 (million)," Flaum said.

"We have another election coming up in 2024," said Neil Solarz, an estate planning attorney at law firm Weinstock Manion in Los Angeles. "It's theoretically possible for Democrats to increase their majority in the Senate and take back the House," meaning clients shouldn't get comfortable with wishful thinking that maybe the sunset won't come — since Democrat leaders have proposed eliminating estate tax loopholes for the rich.

"We know what's available today. We don't know that some of these techniques are going to be (around) that much longer," Solarz said.

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Know the most common trust tools

Arizent identified in its report several tools that are commonly used by wealth management firms with a wealth transfer strategy in place to systematically aid clients in passing down assets.

These include qualified personal residence trusts "to erase the value of a personal residence from the total value of an estate," irrevocable life insurance trusts, which "reduce the value of a policy's death benefits within an estate," grantor-retained annuity trusts, charitable remainder trusts that "avoid capital gains taxes and provide a deduction when assets are transferred into it" and "intentionally defective grantor trusts," which include assets "that compound outside a taxable estate," the report said.

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Leave plenty of time for refinement of a trust

It can take "anywhere from a few weeks to a few months" to draft an initial trust with all the paperwork and discussions involved between a client and their attorney, Flaum said.

"And then the clients need to review it, see if they have questions or revisions."

"The trust has to be essentially perfect and properly executed before it can be a valid receptacle for a gift." This is why waiting until late 2025 is risky — it might result in a poorly designed trust that will be tough, though not necessarily impossible, to modify later when things change for the client's family.

Don't over-give to irrevocable trusts

For high net worth clients who are on the lower end of the millionaire spectrum, impulsively transferring too much of one's wealth into irrevocable trusts just to max out on exemptions may also pan out poorly, Flaum said.

For example, if a client only had $15 million and they maxed out their nearly $13 million of lifetime exemptions this year by giving to irrevocable trusts for their children, that client would be left with only around $2 million in spending money to live off of for the rest of their retirement. If they live longer than they expected to, or incur unexpected retirement expenses, they might be forced to depend on their children for additional support later.

"You should never put so much money in a trust that it's going to leave you uncomfortable about the idea of sustaining your own lifestyle," Flaum said.

High net worth clients on a tighter budget could use alternatives that are more flexible.

"We might talk about annual exclusion gifts, or educational gifts — if I pay your tuition directly to your school, it does not count as a taxable gift," Flaum said.

The best of these alternatives might be paying medical bills for one's heirs.

"It doesn't matter if surgery costs $10 million. If you pay the medical provider directly, it is a tax-free gift."