Estate tax exemption likely to stay high (or disappear) under Trump II

Now that Donald Trump has won a return to the White House the future of the estate tax is a little clearer.

The estate tax, along with the rest of the Tax Cuts and Jobs Act, is slated to sunset at the end of 2025. If the estate tax exemption reverts to the pre-TCJA amount, it will represent the biggest estate tax increase in 85 years, said John Resnick of The Resnick Group.

Based in Naples, Fla., John and his wife Billie focus on estate planning, life insurance guidance, and business succession. They have been busy in recent months crafting estate plans for high-net-worth clients.

Clients who can breathe a little easier now that Trump will return to office. With Republicans set to control the Senate and likely the House of Representatives, the party will have broad power to extend the tax cuts.

Beyond that, it's hard to say for sure, said Billie Resnick.

"How long a reprieve would depend on one of several outcomes. With GOP gaining majority control, the TCJA could be extended with a simple majority," she explained. "An unknown factor is whether the increasingly large deficit will pull enough Republicans from voting to extend the tax cuts, especially with all the other tax breaks being proposed."

A life insurance issue

The TCJA more than doubled the maximum families can give their beneficiaries without incurring federal gift or estate taxes. This applies to gifts made either while alive or as part of an estate.

The gift and estate tax exemption is adjusted annually for inflation and is $13.61 million for a single person in 2024. Unless Congress acts to extend the current language, the estate tax will revert to 2017 levels, or about $7 million.

Even at the higher $13.61 million estate tax threshold, it isn’t hard for successful business owners to hit that figure, Resnick said. If it reverts to $7 million, it will have a significant impact on estate planning, he added.

“Many of these families will be heavily impacted because they typically don’t keep a lot of cash sitting in bank accounts,” Resnick explained. “What’s worse, estate taxes are due in cash nine months after death, so trying to pay the tax can be devastating to some.”

Life insurance is a popular strategy to help high-net-worth clients avoid leaving their heirs with painful estate tax bills.

An Irrevocable Life Insurance Trust is created outside the client’s taxable estate, and the trust’s income is used to purchase life insurance on the parents, Resnick said. When they die, the life insurance proceeds are paid 100% tax-free to the trust that is the named beneficiary. The trust can purchase assets from or loan money to the estate, which often doesn’t have the cash to pay estate taxes.

“If the life insurance is designed correctly, the cost to pay for the death benefit can be 50% to 80% lower than the cost of the estate paying the tax using its own resources,” Resnick said. “All this is accomplished 100% tax-free. Life insurance in an ILIT can truly be one of the most powerful strategies available in the estate tax code.”

'Extremely high' concern

Before the election, KPMG heard from clients with an “extremely high” level of concern, said Tracey Spivey, partner, and leader of the Private Enterprise, tax sector at the firm.

There are other strategies to mitigate the potential estate tax bill, Spivey noted.

“A lot of our clients are assessing, if they haven't already done so, whether or not it makes sense for them to be proactively making gifts to utilize these elevated exemption amounts,” he said. “The IRS has come back and said that there isn't going to be this recapture concept in play for those that do and so many, many of our clients are looking at whether or not going ahead and making sizable taxable gifts … before the end of 2025.”

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.