As the presidential election approaches with no clear frontrunner, many high-income taxpayers are strategizing to shield their wealth from possible tax increases, according to experts.

If former President Donald Trump’s tax reductions come to an end as scheduled at the conclusion of 2025, a key change will be the reduction of federal estate and gift tax exemptions.

Thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), these exemptions were substantially increased. The exemption amount for 2025 is projected to be $13.99 million per individual, a slight increase from $13.61 million for 2024. However, these elevated exemptions will revert to around $7 million (about $5 million when adjusted for inflation) after 2025, unless Congress decides to extend the current provisions.

The Tax Policy Center anticipates that just over 7,000 tax returns will face estate taxes in 2024, while nearly three times that number (approximately 19,000 returns) will encounter estate taxes once the thresholds decrease after 2025.

This number may seem small among the general population, but many in this category are currently making proactive plans, experts added.

What’s at stake?

The estate tax rates vary from 18% to 40%, depending on how much is over the exemption threshold. Each tax bracket has a base tax amount along with an additional marginal rate.

In addition, some states impose estate taxes, but their exemption thresholds and maximum tax rates tend to be significantly lower than those set by the federal government.

Is it premature to plan without knowing the election results?

“Planning now has no drawbacks,” stated Brian Large, a partner at financial planning firm Lenox Advisors.

The TCJA marked the most extensive revision of the tax code in three decades. It introduced sweeping tax cuts for both individuals and businesses that are set to lapse at the end of 2025. Considering the multitude of upcoming tax changes, numerous accountants, lawyers, and financial advisors anticipate a busy schedule ahead. Effective planning may involve legal paperwork, transferring large amounts of wealth, and more—all processes that require time, they noted.

“The next year and a half are going to be quite turbulent for all of us,” remarked Miklos Ringbauer, founder of accounting and tax strategy firm MiklosCPA. “Every taxpayer should be proactive regarding the upcoming changes.”

How are the wealthy utilizing trusts before TCJA expires?

Those in the top income bracket are maximizing their gifts to heirs and/or trusts using the elevated estate and gift exemption limits, aiming to decrease the size of their estate to lessen any future tax implications.

Assets placed in irrevocable trusts are excluded from one’s estate, although this means relinquishing control over them. The most effective strategy involves funding these trusts with assets that are likely to appreciate, allowing the original asset and all subsequent gains to be transferred without incurring taxes.

There are various types of irrevocable trusts, such as:

Grantor-Retained Annuity Trust (GRAT) allows the creator of the trust to receive regular fixed payments over a designated duration while paying taxes on the income the trust generates. These annuity payments, based on a percentage of the trust assets plus interest, appeal to older individuals seeking consistent income. Upon the conclusion of the term, the heir obtains the remaining trust assets without tax obligations.

GRATs typically hold assets that yield high returns or are expected to increase significantly in value, as they are intended to outperform the IRS’ Section 7520 rate, known as the hurdle rate—this is the minimum expected return on the investment. Any appreciation exceeding that hurdle rate is tax-exempt for the beneficiary after the GRAT concludes. In October, this rate was 4.4%, the lowest since June 2023, and is likely to decrease further as the Federal Reserve continues to cut interest rates, financial advisors suggest.

This scenario allows individuals to establish a series of short-term GRATs along with their annuity payments, according to Karen Fierro, a tax partner at advisory firm Wiss.

“This strategy allows the principal to remain within each trust for a more extended period for growth—albeit in different trusts,” she explained. Moreover, it enables capturing the anticipated drop in interest rates. Each Federal Reserve rate reduction could lead to a lower hurdle rate, thus allowing for greater tax-free appreciation to be passed on.

If the GRAT doesn’t exceed the hurdle rate, it is deemed unsuccessful, and the assets revert to the creator, resulting in minimal risk. However, should the creator pass away before the GRAT concludes, the assets would then revert to their estate and could be subject to taxes.

Spousal Lifetime Access Trust (SLAT) enables spouses to separate some of their assets and “gift” them to each other using irrevocable trusts, effectively excluding them from their taxable estate. Essentially, one spouse gifts assets such as cash, life insurance, marketable securities, real estate, or other assets solely owned by them into a SLAT and pays
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The trust’s income is subject to taxation. The spouse who benefits from the SLAT may request distributions for their living expenses, and upon their passing, the SLAT is dissolved. The remaining assets are then passed to the other beneficiaries without any taxes involved.

What are some other strategies apart from trusts?

Intra-family loans provide a way to transfer wealth across generations without using the lifetime gift exemption. For instance, a family member can borrow money to purchase a home or finance a potentially profitable business, under more favorable terms compared to a commercial loan, says Fierro.

The interest rates on intra-family loans are set based on the IRS‘s applicable federal rates (AFR) for different loan durations. The AFR was at 3.64% for loans lasting 3 to 9 years in November, while commercial loans could exceed 5% based on creditworthiness and other criteria. If interest rates decline as anticipated, these intra-family loans can also be refinanced.

Since you receive repayments with interest, this strategy does not diminish your estate’s value for tax purposes. You are effectively passing on some of the growth from the loaned funds to the borrower without utilizing any estate tax exemptions. According to Fierro, the lower the loan’s interest rate, the greater the likelihood that the asset will appreciate more than the interest owed.

• Example: A parent provides their child a 12-year interest-only loan of $1 million at an AFR of 2.25%. The child invests the funds in assets that appreciate, generating a 10% after-tax return. After 12 years, the child’s investment grows to $3,138,428, while the loan’s outstanding balance is $1,306,050. The excess $1,832,378 is a tax-free transfer of wealth to the following generation.

Gifting non-publicly traded assets allows individuals to leverage potential valuation discounts and growth opportunities. By donating assets that are hard to gauge in terms of “fair market value,” the law permits them to be valued at a discount, considering elements like limited marketability or lack of control if it’s a nonvoting or noncontrolling interest in a business. Discounts can vary from 10% to 50%, but it’s essential to have a professional appraisal.

Experts suggest that combining this approach with a trust could yield even more advantages.

Is it possible for politicians to extend the tax cuts?

Yes, it is feasible, but could be challenging.

Former President Donald Trump has indicated a commitment to maintain most of the tax cuts, including those related to estate taxes. Meanwhile, Vice President Kamala Harris has expressed intent to increase taxes on high-net-worth individuals but has not specifically addressed estate taxes.

The complexity stems from the fact that Congress must approve tax reforms, and the control of Congress remains uncertain, according to experts.