If you are like many people, you put off finalizing estate tax planning until the results of the 2024 election were in. Some people held off on any gifting to make a final decision. Others set up trusts and gifted smaller amounts to them as a placeholder. Now that the White House and both houses of Congress are comfortably red, what comes next?
The 2017 Tax Cuts & Job Acts and the current $13.61 million federal estate tax exemption expire on December 31, 2025. While Republicans have expressed their intention to extend the 2017 tax law within the first 100 days of the new administration, the specifics of this extension remain uncertain. This uncertainty calls for a cautious approach to estate tax planning.
After the election, the House will be in the Republicans’ control by a thin majority. Republicans will have a majority in the Senate with 53 seats. However, having a majority in both houses does not guarantee the extension of the 2017 tax law. The use of a filibuster by Democrats, a tactic used to delay or block a vote, must still be considered. In the House, a simple majority is required to avoid a filibuster. However, 60 votes are needed in the Senate to avoid a filibuster. The Republicans will not have 60 votes without support from the Democrats, which is unlikely.
To avoid a filibuster in the Senate, Republicans will most likely use the budget reconciliation process. Budget reconciliation is a process that was created in 1974 as a way to expedite the passage of tax and monetary laws. It is a quick way to pass legislation. A simple majority in both Houses would allow the tax law to be extended by budget reconciliation, thereby avoiding a filibuster.
However, the process of extending the tax law is not without its challenges. Determining the coast of the package and how to fund it are significant hurdles. With an estimated cost of over $4.6 trillion, adding trillions of dollars to the deficit may pose problems for some Republican lawmakers, possibly delaying the law’s extension. Awareness of these potential obstacles is crucial for effective estate tax planning.
Another wrinkle of the budget reconciliation process is that any law that reduces taxes must be eliminated within 10 years. This is known as the Byrd Rule (after Senator Robert Byrd), which is why the 2017 law is set to expire in 2026. The Byrd Rule can be avoided with 60 Senate votes, which the Republicans do not have. Therefore, any extension of the 2017 tax law will likely include a sunset provision, causing it to expire within 10 years.
Since any extension of the 2017 law is likely to sunset, estate tax planning should continue to take advantage of the increased exemption. However, if you were not ready to pull the trigger with your gifting in 2024, you will likely have some breathing room and additional time to make final decisions.
Many couples with assets in excess of $50 million, already took advantage of the high federal estate tax exemption by gifting $26 million to irrevocable trusts. Those clients should continue to top off those gifts by using up the additional exemption available each year, as the exemption is adjusted for inflation. In addition, they may want to consider other estate planning techniques, such as grantor -retained annuity trusts and sales to grantor trusts, which are unlikely to be targeted by the next administration.
Couples or individuals in the $20M to $50M range who have not gifted may want to establish a stand-by trust and gift a smaller amount to the trust ($1 million, for example) to get used to gifting and see how it feels. Depending on the 2017 tax law, they will be able to quickly gift larger amounts to the trust.
If you set up a spousal lifetime access trust (or SLAT) in 2024 with the plan of gifting $13 million to it after the election and then setting up a second SLAT in 2025 to fully utilize the $26 million available to couples, you should consider moving forward with your plan. When you set up a SLAT for each spouse, it is advised that you do so in separate tax years. The longer the length of time between the establishment of each SLAT, the better. Now is the time to take advantage of the delay in the likely sunset of the 2017 tax law by creating your SLAT’s a few years apart. Couples who set up a SLAT in 2012 (when the federal estate tax exemption was scheduled to drop to $1 million), were in a great position to create a second SLAT with the sunset of the 2017 tax law.
Finally, if you live or own assets in a state with a state estate tax, don’t overlook the benefits of gifting on your state tax liability.