Advance Planning for High-Net-Worth Estates Is Still Important

With the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, many high-net-worth individuals breathed a sigh of relief, especially because of the provision that significantly raised the estate tax exemption ($12.92 million per individual for 2023). Under the new rules, fewer than 2,000 estates in the entire U.S. would owe estate taxes, according to estimates. In other words, for the vast majority of large estates, the higher exemption currently makes estate planning much simpler.

But the key word in that last sentence is “currently.” Early in the Biden presidency, provisions that would have increased taxation on large estates were under consideration as part of the president’s “Build Back Better” plan. When many of those initiatives met with legislative stalemate, some may have assumed that high-net-worth estates had little to be concerned about. However, many analysts believe that we are already in a period of historically low tax rates and that future increases of some sort are inevitable in order for the federal government to maintain its ability to meet current and future obligations. It’s also important to remember that the higher exemption written into the TCJA is set to expire, or “sunset,” in 2025. Unless Congress passes legislation to retain it, the current, higher exemption will expire on January 1, 2026, reverting to its pre-2017 level of $5 million per individual, adjusted for inflation.

Since the passage of TCJA, high-net-worth individuals have been well-advised to take advantage of the currently high exemption to begin transferring assets out of the estate, utilizing gifting programs, various types of trusts, and other estate planning tools that can help reduce the quantity of assets taxable to the estate upon transfer. It has also been important to keep an eye on legislative developments, as some tools, such as grantor trusts, could be subject to changes in the tax code if certain legislation passes Congress. Tax laws change frequently, so owners of large estates should not assume that 2025 is the next deadline they need to worry about.

Such considerations can also impact current portfolio decisions. For example, suppose an estate includes a concentrated position in inherited common stock that is highly appreciated (not unusual). Liquidating the position in order to diversify may entail recognizing a substantial capital gain, even with a stepped-up basis in the stock. While most would be reluctant to take the tax hit now, preferring to delay it as long as possible, it could make more sense to bite the tax bullet earlier, given the possibility of an even greater gain being taxed at an even higher rate in the future. And remember that the current maximum long-term capital gains tax rate for most taxpayers is 15%, while the potential estate tax generated by such a holding could be as high as 40%. The scenario above could also apply to other types of assets, such as real estate. For some high-net-worth individuals, gifting such appreciated assets by means of a charitable remainder trust or donor-advised fund could be wise strategies. Other, less-appreciated assets might be more advantageous to retain in the estate for the benefit of heirs, since they could be less likely to generate disadvantageous tax consequences.

Modera Wealth Management, as a fiduciary financial advisor and wealth manager, is devoted to helping clients retain control over their assets to the degree possible, so that they can direct their resources toward meeting their most cherished goals. To learn more, read our recent article, “Introduction to Estate Planning.”