The year-end 2024 crunch is coming. What should you consider and do now? So much is happening that affects your estate planning, and you need to evaluate it. Your estate planning world is changing in dramatic ways. Getting a big-picture view of many dynamics can help you consider what you should be doing.
Corporate Transparency Act
Filings are due 12/31/24. Most business owners and others in control positions over entities that will have to report appear not to have addressed filing yet. Even for many that have begun, it does not appear they understand the ripple effects of filing requirements on trusts and other structures. Finally, FinCEN issues new FAQs that complicate the reporting process (e.g., dissolved entities, trusts, etc.). Noncompliance penalties are about $600/day per infraction and up to two years in jail. And this may require much more than just filling out the FinCEN form online. You may need to revise bylaws and shareholder agreements for entities, change people appointed in trusts that own entities, or even decant those trusts. If you haven’t dealt with this, you need to.
Pre-2026 Planning Needs to be Done Sooner
This is not just planning; you must do it before the end of 2025, when the exemption will be cut in half. From several planning perspectives, you need to address this before the end of 2024. That is essential to provide an opportunity to create Spousal Lifetime Access Trusts (“SLATs”) in different tax years, retitle assets in different tax years, and have more time between various transfers (e.g., husband gifts assets to wife and thereafter, wife gifts assets to an irrevocable trust). Time compression will harm planning. The less time between various planning phases the more susceptible that planning may be to IRS challenge under the reciprocal trust doctrine (various trusts were so similar they can be unwound), and the step transaction doctrine (various steps in your plan will be disregarded thereby altering the outcome from what you intended). So, the deadline for safer planning is in some sense 12/31/24.
Who May Win the Presidential Election?
Political chatter aside, you should plan for any possible outcome. If President Trump wins re-election, he may succeed in repealing the estate tax. So, ensure your planning is comfortable and sensible for non-estate tax reasons. Vice President Harris may win, and the Democrats may secure enough votes to enact harsh estate tax changes along the lines of what they have repeatedly proposed for over a decade. Vice President Harris appears to have indicated that she will support harsh tax changes on the wealthy along the lines of the recently issued Senator Elizabeth Warren’s tax proposal, the “American Housing and Economic Mobility Act of 2024.” If that could occur, planning for the 2026 exemption reduction will be overtaken by the critical need to prepare much sooner and for much more drastic changes. Tee up your planning steps now, even if you prefer to wait longer to pull the trigger. Retitle assets to facilitate planning and set up grantor trusts. You should prepare your documents and planning in the on-deck circle, or you may have insufficient time to do anything. Waiting until after the election results are known might eliminate an opportunity to do any careful or thoughtful planning. You can set up an inexpensive trust in your home state with a family trustee and trust protector who can move to a better jurisdiction if Harris wins. If you have gift or other transfer documents prepared, you could sign them as late as New Year’s Eve to consummate planning. But this will only be possible if it’s all set in advance. You might discuss drafting provisions with your estate planner to anticipate those changes now. What about giving a special powerholder acting in a non-fiduciary capacity the right to defer a descendant’s status as a beneficiary vesting to defer the harsh GST tax proposals? One of the changes proposed in the Warren plan might result in the application of a GST tax as soon as a great-grandchild becomes a beneficiary. The way many trusts are drafted includes all “descendants” as beneficiaries. Perhaps it might be advantageous if someone can defer when a descendant becomes a beneficiary to defer negative tax implications. Flexibility is almost always advisable, with unknown tax changes looming.
FTC Ban On Noncompete Agreements
The FTC issued a Rule prohibiting most non-compete agreements. The restriction is extensive and harsh. A few exceptions were provided for agreements with certain senior executives existing before the September effective date and for those owning and selling equity in a business. The rule seems to have been stopped by a court for now, but if you rely on non-competes to protect your business, and to facilitate succession planning, revisit all these restrictive arrangements and endeavor to make them more supportable in case the rule banning non-competes is salvaged or if your state enacts restrictions. When the ban was first proposed, many attorneys began to rethink what might be feasible. Those considerations should still be explored.
Insurance-Funded Buy-Sell Agreements
The Supreme Court’s holding in the Connelly made it clear that if you have a business entity that owns life insurance on its owners to fund a buy-out if they die, the value of the life insurance must be included in the value of the business. That value cannot be reduced by the obligation the business faces to buy out the equity owner’s interests (e.g., a deceased shareholder’s stock). A technique that some had used, an insurance LLC, to own the life insurance appears to be subject to the same rules. This case should be a general wake-up call for all closely held businesses to review their buyout arrangements and be certain that the terms of the agreements make sense, that the valuations are current, and that the estate tax consequences of this Connelly case are addressed. This is really not something that should be put off as some agreements will have a disconnect between what the owners believe will happen and what the results will actually be. Finally, the Elizabeth Warran tax proposal calls for a $3.5 million exemption so, if that is enacted, many more business owners will be subject to estate tax than under the current $13,610,000 exemption amount.
Loper and Deference to Governmental Agencies.
The Supreme Court in the Loper case overruled the deference given to agencies such as the IRS under the landmark Chevron doctrine. In simple terms, that means that unless the statute involved expressly stated that the agency, e.g., the Treasury (IRS), should issue guidance on the law, the courts are not bound to give deference to what the IRS has said but rather can interpret an ambiguous law themselves. This is all still pretty muddled, and more guidance will be necessary to understand how to interpret what different language in a statute may mean regarding the clout of an IRS regulation. However, you should discuss with your CPA revisiting some planning decisions, how some tax returns were filed, and evaluate whether filing protective claims for refunds may be advisable. Some tough positions that the IRS took on different areas of the tax law may now be more susceptible to challenge.
New IRA Regs
The Treasury has issued final Regulations providing guidance for the Secure Act. They generally apply to calendar years beginning on or after January 1, 2025. These Regulations address various retirement plan rules, including using trusts to hold retirement plan benefits for minors, the separate accounts rule, and more. Generally, annual RMDs for IRAs are required, subject to the new 10-year rule. A surviving spouse may wait to begin distributions until the deceased spouse would have reached their RBD. Outright distributions to a trust beneficiary and splitting/distribution in case of multi-beneficiary trust is allowed. Full distribution by the end of the calendar year includes the tenth anniversary of death. This rule applies if a qualified Designated Beneficiary is not an Eligible Designated Beneficiary (e.g., someone disabled). For traditional IRAs consider tax bracket management prior to year 10. For Roth IRAs, wait until year 10 to maximize tax-free compounding. Review client planning and beneficiary designations to see if updates are advisable.
Audits Will Increase
The IRS audit rates of tax returns of high-income and wealthy taxpayers will increase. by 50%. Be proactive and clean up your tax compliance before the audit notice arrives. Set up a meeting with your CPA, not to focus on preparing a tax return but to take a big-picture review of your planning, tax returns, recordkeeping, and more. Most taxpayers’ relationship with their CPAs focuses on completing their tax returns. That’s important but not enough if audit rates increase. Do you have an S corporation? Have you been underpaying your salary to save payroll tax? Have you had your CPA help you build a file supporting the tax filing positions you have taken? Are you using your business to pay for personal expenses? Do you maintain proper records? Is your personal automobile inappropriately owned by your company? Identify issues and take corrective action before you receive an audit letter.
Will Your Advisers Be Able To Help?
While most clients believe, perhaps rightfully, that they can always call on their advisers to get help, that may not be possible. First, if the election (whichever way it concludes) leaves either party in control in Washington, there will be a tidal wave of clients asking advisers for help. It simply may not be possible for advisers to help all who call. This may be a repeat of the crunch at the end of 2012. Then, the law provided that the estate tax exemption would drop from $5 million to $1 million. Many advisers (appraisers, attorneys, and others) stopped accepting new work by September because they were too busy. Don’t get yourself in that pickle; act sooner. Don’t wait. Another issue is the Corporate Transparency Act. One state bar issued tough conclusions that advising on the Corporate Transparency Act is the practice of law, and only lawyers can do it. They carved out a special exception to permit CPAs to assist clients if the issues and filings were not “complicated.” And what determines what is complicated with such an obtuse law? The result is that non-lawyer advisers may limit the help they will give or even restrict what they do to providing generic advice. While lawyers can offer advice, not all law firms have geared up by studying the new rules, and some have been wary of getting involved given the complexity, uncertainty, and harsh penalties that can be assessed. The bottom line is those seeking professional help may not find that they can get the help they need, especially if they wait too long.
Evolution of the Estate Planning Professions
Estate planning is rapidly changing and that will affect who you speak to and how you get help. Some of this will be a positive development for taxpayers, and some won’t be. But in all cases, you will have to be a more discerning client to get the help you want.
AI is and will transform the profession even more. AI can be a powerful and helpful tool. But as you have no doubt seen, it can be abused, and some advisers may rely on AI when they should not. The role of financial advisers in providing estate planning is growing and will change the dynamic of estate planning, with wealth advisers more often leading the charge on much of estate planning. That is good for consumers because it may offer more ongoing contact and continuity of planning. But it can also be dangerous for consumers. How capable is the wealth adviser or the estate planner in the firm you have been assigned to speak to? Are they relying on AI software to do work that may really require a skilled estate planner? Is your wealth adviser fostering collaboration with your attorney and CPA, enhancing the help you are getting? That would be great. Or is your wealth adviser trying to keep you as controlled as possible to retain you as a client? That may not be so good. The bottom line is that the continuing evolution of estate planning will create confusion and disruption, but paying attention and asking questions can provide a better result for consumers.
Overwhelming Change
An incredibly number of issues and planning matters are in flux now. The pace of change is overwhelming, and many practitioners cannot possibly cope with all of this. Even in a larger firm, it is a challenge. What can you do? Consider involving more specialists on your planning team. Be open to rethinking what the role of each of your advisors will be. A collaborative and fluid team, where the mantle of team quarterback rotates among advisers as planning needs and new developments occur, may become the new gold standard for your planning. The team must be fluid as different experts consult with your core team as needed. You might need a care manager, art expert, special needs attorney, or other experts involved as appropriate. Be wary of any firm or adviser that suggests they can handle everything and have all the answers. It is getting more challenging to do that.