Tax Cuts and Jobs Act Sunset

For wealthy individuals and families, taxes are typically top of mind when it comes to managing their finances effectively. The 2017 Tax Cuts and Jobs Act (TCJA) provided significant relief by doubling the estate tax exemption, among other provisions. However, these favorable terms have a rapidly approaching expiration date as the TCJA cuts are set to sunset in 2025.

As the sunset deadline looms closer, financial advisors are proactively working with their high-net-worth clients to put strategies in place to prepare for the likely expiration of the TCJA’s key provisions. The focus is on creating tax efficiency today while aligning clients’ long-term goals and priorities.

Financial planners have been talking to clients about the tax cut sunset since Congress passed the Tax Cuts and Jobs Act in 2017. The potential expiration of the expanded exclusion is a motivating factor to engage in estate planning and professionals are focusing on proactive planning for clients regardless of future changes in the tax law.

So, what specific strategies are advisors deploying? Here are some of the key ones:

Accelerating Income/Deductions
For clients facing potential income tax increases, advisors may recommend accelerating income into the current year to take advantage of lower rates. Conversely, deductions such as charitable contributions could be “bunched” into a single year.

Roth Conversions
Converting traditional IRA funds into Roth accounts allows investors to pay taxes now at potentially lower rates. This protects retirement assets from future required minimum distributions at potentially higher tax rates.

Flexible Gift Planning
The TCJA doubled the estate tax exemption to roughly $12 million per individual, making it an opportune time for wealthy clients to gift assets in advance of a potential halving of the exemption levels.  However, advisors also caution to keep gifting options flexibly structured until exemption levels are either repealed or extended.

While the possibility of the TCJA sunset reinforces the need to review existing and future estate planning options, professionals caution clients to plan but reserve immediate action until lawmakers agree, disclose, and implement change.

Quantifying Capital Needs
Advisors are continually developing and utilizing new proprietary analytical tools to determine the amount of capital clients need to sustain their lifestyles through retirement with a high degree of confidence. Armed with this information, professionals can tailor decisions regarding excess capital to create tax-advantaged plans under current tax levels.

Acting Promptly but Carefully
While addressing the tax cut sunset is critical, advisors are counseling clients on the importance of taking enough time to execute these complex strategies properly. The fear is a last-minute rush in late 2025 could decrease viable options due to implementation deadlines and limited professional resources available. Rushing into ill-conceived options may increase IRS scrutiny.  

Indeed, the IRS has already successfully challenged certain aggressive workaround attempts by wealthy taxpayers. As one example cited, the agency reversed an attempted strategy where one spouse used their full exemption to gift money to their children, then facilitated the other spouse regifting funds to the same children using their exemption – a move the IRS firmly rejected.

With the sunset deadline less than two years away, financial advisors are clearly prioritizing discussions with their clients concerning tax-efficient estate planning and wealth transfer given the changing regulatory landscape. Proper execution of these strategies requires ample time and care. Proactive planning today allows clients to optimize their scenarios whether the tax cuts are extended or expire as scheduled.

The Estate and Tax Attorneys at RJS LAW are available to discuss options and create new or amend existing Estate Plans to best suit your financial situations and wealth transfer plans. For a no-cost consultation, please visit our website at RJS LAW or call 619-595-1655 to schedule an appointment.

Written by Devon J. Arabo, Esq., LL.M.