As we approach the 2024 election, wealthy individuals face significant changes to their financial outlook – and while some are tempted to wring their hands in agony about the future – it is best to face the possibilities head on and prepare. Both major candidates, Kamala Harris and Donald Trump, have distinct approaches to tax policy that could dramatically affect estate planning, capital gain tax rates, and charitable giving strategies. Here’s a balanced, politically unbiased overview of how to help your clients prepare for these possible changes—regardless of the election outcome.
Election and the Tax Cuts and Job Act
The Tax Cuts and Job Act (TCJA) expires at the end of 2025 regardless of the election. A Trump administration will likely attempt to extend the TCJA or even make it permanent. The outcome of this attempt largely depends upon which political party controls the U.S. House of Representatives and Senate. Kamala Harris will likely not extend the TCJA.
Year-end action steps
- Take advantage of the current $13.61M federal estate tax exemption
- Accelerate charitable giving to capture tax savings
- Consider liquidating capital assets to lock in current favorable capital gain tax rates
- Utilize tax-efficient strategies such as charitable trusts (CRTs and CLTs) and donor-advised funds (DAFs) before potential changes
- Donate highly appreciated stocks to a DAF to avoid capital gains tax on an outright sale of the stock
If Kamala Harris is elected
A Harris administration could propose higher taxes on wealth, including taxing unrealized capital gains, lowering the estate tax exemption, and eliminating the step-up in basis for inherited assets, all of which would significantly impact wealthy individuals.
- Higher marginal tax rates: This could reduce the disposable income of high earners, potentially limiting their ability to donate to charity or reinvest.
- Tax on unrealized capital gains: Wealthy investors would be taxed on the appreciation of their capital assets that are not sold, increasing their overall tax burden.
- Lower estate tax exemption: A reduced exemption would expose more of an individual’s estate to taxation, making it more costly to pass wealth to heirs.
- Elimination of step-up in basis: Heirs would face capital gains taxes based on the original purchase price of inherited assets, potentially leading to substantial tax bills on appreciated assets.
Understanding the timeline and impact of post-election changes
- No immediate changes on November 5th
The actual process of change takes time due to the legislative process. - Presidential power is shaped by Congress
A President’s effectiveness depends on support from the House and Senate. Without it, enacting new policies can be difficult, often leading to compromises and delays. - Changes likely in 2025, possibly retroactive
Policy changes may take effect by mid-2025, though some could be retroactive, affecting all gains in that year.
If Donald Trump is re-elected
Trump’s administration would likely focus on maintaining or expanding the provisions of the Tax Cuts and Jobs Act (TCJA), including keeping the estate tax exemption high and tax rates lower.
- Continuation of the TCJA provisions: The higher estate tax exemption and lower tax rates on income and capital gains may be extended, depending on the political makeup of Congress.
- Repealing the SALT Cap: Donald Trump has recently proposed repealing the $10,000 State and Local Tax (SALT) deduction cap. If this repeal moves forward, clients impacted by the cap should start considering how to adjust their tax strategy. One effective approach could be leveraging charitable strategies, such as Donor-Advised Funds (DAFs), to maximize deductions and manage their tax burden efficiently.
- Potential for expanded tax cuts: Trump has previously proposed additional tax cuts, including potentially lowering the top marginal income tax rate further and reducing capital gains taxes.
- Business tax incentives: The 20% deduction on pass-through income for business owners could remain in place, continuing to benefit high-income earners.
Current strategies from advisors:
1. Accelerate estate planning and gifting
- Utilize the current estate tax exemption: The $13.61M exemption may decrease; advise large gifts or placing assets in irrevocable trusts now.
- Utilize annual gift tax exclusion: Encourage gifts of $18K per recipient to reduce estates.
2. Accelerate charitable contributions
For clients planning future charitable donations, encourage accelerating those contributions before potential tax law changes. Donate appreciated assets to avoid capital gains on an outright sale of the stock.
3. Tax-efficient investment strategies
Prepare for possible step-up basis elimination by selling appreciated assets or adopting tax-efficient strategies. Diversifying holdings can also help reduce future tax impacts.
4. Rebalancing portfolios, donating to DAFs, and considering the SALT Cap
Clients should consider the impact of the current $10,000 cap on State and Local Tax (SALT) deductions when planning. If this cap is removed or altered under a new administration, it could significantly change their overall tax burden. Clients should maximize deductions through charitable giving to help offset the limited deductibility of state and local taxes.
5. Use Life Insurance Trusts
An Irrevocable Life Insurance Trust (ILIT) can keep life insurance proceeds out of the taxable estate, helping heirs cover estate taxes
6. Review Family Limited Partnerships (FLPs)
Family Limited Partnerships (FLPs) can transfer wealth to heirs at a discount while allowing clients to maintain control of assets. This is beneficial for estate tax planning, especially before any new tax laws are passed.
7. Prepare for volatility
If taxes on unrealized gains are introduced, market volatility could increase as investors sell off assets. Advise clients to stay ahead of potential downturns by rebalancing or hedging portfolios.
Conclusion: Stay flexible and proactive
The outcome of the 2024 election could bring significant changes to tax laws that impact estate planning, investment strategies, and charitable giving. As advisors, your role is to keep your clients informed and prepared, regardless of who wins the election. By taking proactive steps now, you can help them protect their wealth and maximize the benefits of current tax laws, while remaining flexible enough to adapt to future policy changes.
