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A version of this article first appeared on CNBC's Inside Wealth with Robert Frank, a weekly guide for high-net-worth investors and consumers. Register to receive future issues directly to your inbox.
The tight presidential race has triggered a wave of tax planning by ultra-wealthy investors, especially given fears of a higher estate tax, according to tax advisers and lawyers.
The expected “end of life” date for a generous estate tax provision has taken on new urgency as the odds of a divided government or a Democratic president have increased, tax experts say. Under current law, individuals can transfer up to $13.61 million (and couples can send up to $27.22 million) to relatives or beneficiaries without having to pay estate or gift taxes.
The benefit is set to expire at the end of 2025 along with the other individual provisions of the 2017 Tax Cuts and Jobs Act. If it expires, the estate and gift tax exemption will be cut roughly in half. Individuals will only be able to gift between $6 million and $7 million, and that amount increases to between $12 million and $14 million for couples. Any assets transferred above those amounts will be subject to the 40% transfer tax.
Wealth advisers and tax attorneys said expectations of a Republican landslide in the first half of the year led many wealthy Americans to take a wait-and-see approach as former President Donald Trump seeks to extend the 2017 tax cuts for individuals.
Vice President Kamala Harris has advocated for higher taxes on those making more than $400,000.
With Harris and Trump now virtually tied in the polls, the likelihood of the inheritance tax benefits expiring, either through gridlock or tax increases, is increasing.
“There's a little bit more urgency now,” said Pam Lucina, a trustee director at Northern Trust who heads its trust and advisory practice. “Some people have been waiting until now.”
The disappearance of the exemption and the response of the wealthy have broad ripple effects on inheritances and the trillions of dollars that will pass from older to younger generations in the coming years. More than $84 trillion is expected to be transferred to younger generations in the coming decades, and the estate tax “cliff” will accelerate many of those gifts this year and next.
The biggest question facing wealthy families is how much and when to give away, before any estate tax changes take place. If they do nothing and the estate exemption is eliminated, they risk owing estate taxes in excess of $14 million if they die. On the other hand, if they give away the maximum now and the estate tax provisions are expanded, they may end up suffering from “donor’s remorse,” which occurs when donors give away money unnecessarily out of fear of tax changes that never happened.
“In the case of donor regret, we want to make sure clients consider the different scenarios,” Lucina said. “Will they need a lifestyle change? If it's an irrevocable gift, can they afford it?”
Advisors say clients should make sure their giving decisions are motivated as much by family dynamics and personalities as by taxes. While donating the maximum of $27.22 million may make sense today from a tax perspective, it may not always make sense from a family perspective.
“The first thing we do is separate those people who were going to donate anyway from those who have never done so and are only motivated to do so now because of the deadline,” said Mark Parthemer, chief wealth strategist and Florida regional director for Glenmede. “While it may be a once-in-a-lifetime opportunity when it comes to the exemption, it's not the only one. We want people to have peace of mind regardless of how the situation plays out.”
Parthemer said today's wealthy parents and grandparents should make sure they feel psychologically comfortable about making large donations.
“They ask themselves, 'What if I live so long that I run out of money?'” Parthemer said. “We can do the math and figure out what makes sense. But there's also a psychological component to that. As people get older, many of us worry more about our financial independence, regardless of whether the math tells us we're independent or not.”
Some families may also fear that their children are not prepared to receive such large amounts. Wealthy families who were planning to make large gifts a few years from now are feeling the pressure from the tax change to go ahead with them now.
“Especially for families with young children, a major concern is regret about donating,” said Ann Bjerke, head of UBS's advanced planning group.
Advisers say families can structure their gifts in ways that are flexible (for example, giving to a spouse first before giving to children) or set up trusts that allow the money to be spread out over time and reduce the risks of “sudden wealth syndrome” in children.
For families planning to take advantage of the estate tax window, however, the time is now. It can take months to draft and file transfers. During a similar fiscal cliff in 2010, so many families rushed to process gifts and set up trusts that attorneys were overwhelmed and many clients were left stranded. Advisers say donors today face the same risk if they wait until after the election.
“We're already seeing some lawyers starting to turn away new clients,” Lucina said.
Another risk of rushing is running into trouble with the IRS. Parthemer said the IRS recently undid a scheme used by a couple, in which the husband used his exemption to gift money to his children and gave funds to his wife to gift using her own exemption.
“Both gifts were attributed to the wealthy spouse, triggering a gift tax,” she said. “You have to have time to measure twice and cut once, as they say.”
While tax advisers and lawyers said their wealthy clients are also calling them about other tax proposals in the campaign — from higher capital gains and corporate taxes to taxes on unrealized profits — eliminating the estate tax is by far the most urgent and likely change.
“In the last month, investigations have accelerated during the [estate exemption]”Bjerke said. “A lot of people sat around waiting to implement their estate planning strategies. Now, more people are executing them.”
