How Advisors Should Counsel Clients During Tax Law Uncertainty
The 2024 presidential election and anticipated 2025 sunsetting of the Tax Cuts and Jobs Act (TCJA) are creating tax-related uncertainty for advisors and clients alike. But there is still time for clients, especially high-net-worth individuals, to prepare accordingly.
Read on to understand how advisors should counsel high-net-worth clients amidst tax law uncertainty.
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High-Net-Worth Clients Should Anticipate Many TCJA Provisions Expiring in 2025
Currently, a number of Tax Cuts and Jobs Act provisions are set to expire in 2025. And there hasn't been a hint that Congress will extend them beyond 2025.
In this environment, high-net-worth individuals should proceed with the expectation that most provisions will expire, says Brian Schmehil, managing director of wealth management for The Mather Group.
"As of now, we should assume most provisions of the Tax Cuts and Jobs Act will sunset at the end of 2025," Schmehil says.
If Congress doesn't extend the TCJA, high-net-worth individuals will grapple with higher taxes as a result, says Kevin Brady, a certified financial planner and vice president of Wealthspire Advisors.
Absent action, this will organically increase tax rates and lower the estate tax exemption, among other changes, Brady says.
How High-Net-Worth Individuals Should Handle Estate and Gift Tax Exemptions
The surest way high-net-worth individuals should handle estate and gift tax exemptions is by taking advantage of the exemptions now instead of delaying until 2025 or later. Waiting another two years is risky if the provisions are not extended.
"It is wise to take advantage of the current high gift and estate exemptions by gifting assets out of your estate by 2025," Schmehil says. "This will allow you to take advantage of the higher exemption before it is reduced."
How High Net-Worth Clients Should Handle Roth Conversions and SLATs
To execute various estate-planning strategies, high-net-worth individuals can look to create or fund spousal lifetime access trusts (SLATs) before the TCJA expires and the federal gift tax exemption lowers.
The lifetime gift tax exemption is currently $12.92 million. That means a client can give up to $12.92 million in gifts over the course of their life without ever having to pay gift tax on it. For married couples, both spouses get the $12.92 million exemption.
But that limit is expected to fall to $6 million by 2026 when the TCJA provisions expire.
Roth conversions can also be useful for clients who want to convert pre-tax contributions. But Brady says SLATs and Roth conversions should be done under the right circumstances.
"These things are prudent planning moves," Brady says.
Make Changes Based on Active Tax Laws, Not Potential Laws
There is uncertainty as to what the tax laws will be in 2025, but advisors do know the current tax laws in 2023 and 2024. And Brady says clients should only plan on what is in effect now, not potential taxes down the road.
"I tell clients we can only plan and act on tax law that exists today," Brady says. "Planning based on tax legislation that might pass becomes a very tricky game, fraught with potential missteps."
The coming years contain many unknowns related to future tax laws. But advisors should help high-net-worth individuals focus on the tax laws that are in place now. For example, high-net-worth clients should take advantage of the estate and gift exemptions as they are today before they potentially reduce in 2025.
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