Estate reduction surgery may be more urgent than you think.
Understandably, a lot of folks are sitting on the sidelines, waiting to see what happens in November — not only in the presidential race, but in the congressional races that will determine the balance of power. Will one party control Congress, which party will control, and will the margin of control be great enough to allow one party to push through significant change in tax laws?
As it stands now, the current sky high death tax exemption amounts will roughly speaking be cut in half on January 1, 2026. Will the current high exemption level be extended? Will some other regime replace it, perhaps with far lower exemptions, perhaps with more radical changes such as restricting use of grantor trusts in planning, or eliminating basis step?
We don’t have answers now, and we probably won’t have all the answers in November, or December, or January…
Here’s what we do know: If you have a large estate and make a large gift now, before 2026 (assuming the law remains the same until then), and exemptions do subsequently fall, IRS will not be able to “claw back” any gift amount exceeding the new exemption amount.
So it’s use it, or lose it. And this is a very big coupon to use, or lose.
There are reasons to avoid haste. Maybe the current exclusions will be extended. Also, you need to look at any adverse effects such as income tax consequences, possibly loss of basis step-up, etc., depending what kind of solutions are used for estate reduction.
But there are also reasons to get moving on the planning. Some options are already gone. Some options will be gone soon. For example, a very popular solution these days is for a married couple to each create a Spousal Lifetime Access Trust (SLAT) to benefit the other spouse. Although SLATs are becoming common, they are still fairly new and there are uncertainties regarding their use. Most planners agree SLATs are often still a good idea, but to minimize the risk of an adverse result, there are a number of special requirements that any good planner will strongly recommend. One of those requirements is that each spouse’s SLAT be created at least a year apart, preferably longer. Compounding the urgency is that good appraisals are needed, and good appraisers are already backed up for a good amount of time.
All of which is very bad for those high net worth (HNW) couples waiting, especially if they are new clients. I always start new clients off with a restatement of their foundational revocable trust plan, and that usually takes several months.
There are other options besides SLATs, but the point is: options are disappearing as deadlines approach.
