How Estate and Tax Law Impact Wealth Planning

As we approach 2025, high-net-worth individuals and families need to pay close attention to their financial strategies. The 2017 Tax Cuts and Jobs Act (“TCJA”) brought significant changes to the tax code. However, many of these changes are set to expire on December 31, 2025. As fiduciary wealth advisors, we recognize the importance of proactive planning to maximize opportunities and mitigate risks. 

Key Areas of Concern 

Income Tax Rates and Brackets 

The TCJA lowered ordinary income tax rates and expanded tax brackets. If these changes revert to prior levels, we can expect increases in income taxes across the board. To address this, consider accelerating income where possible. While this may not be straightforward for most individuals, small businesses may have some flexibility. Additionally, evaluate Roth IRA conversions carefully. Converting a traditional IRA to a Roth IRA while tax rates are lower can be advantageous. 

Capital Gains and Asset Sales 

Given the possibility of capital gains tax increases, it’s prudent to assess whether selling assets with larger unrealized gains now makes sense. By doing so, you can potentially secure lower tax rates before any changes occur. 

Estate Exemption 

The estate tax exemption, the amount of money you can pass to the next generation through gifting or inheritance, will revert to 2017 levels. Currently set at $13.61 million, it is estimated to return to approximately $7 million (as indexed for inflation). Married couples can double this amount. High-net-worth individuals should review their estate plans to determine if proactive planning is necessary. 

The Power of Financial Goals in Estate Planning 

We’ve emphasized the importance of proactive financial planning in anticipation of tax law changes. Now, let’s explore critical aspects that can significantly impact your wealth preservation strategy. 

Clarity and Purpose 

When you articulate your financial goals, you gain clarity about what truly matters. Estate planning isn’t just about numbers, it’s about ensuring your legacy aligns with your values and aspirations. Consider the following: 

• Legacy Objectives – Do you want to leave a lasting impact on your family, community, and/or a cause you care about? 
• Wealth Transfer Priorities – Are you focused on minimizing taxes, providing for loved ones, or supporting philanthropic endeavors? 

Risk Tolerance and Time Horizon 

Understanding your risk tolerance and time horizon is crucial. Your financial goals will influence how you allocate assets and manage risk. For example: 

• Risk Tolerance – If your goal is wealth preservation, you may prioritize conservative investments. If you aim for growth, you might tolerate more risk. 
• Time Horizon – Short-term goals (e.g., funding education) require different planning than long-term goals (e.g., generational wealth). 

Tax Efficiency and Asset Protection 

Your goals guide tax-efficient strategies and asset protection. Examples include: 

• Gifting Strategies – Annual gifts to family members can reduce your taxable estate. 
• Trusts – Irrevocable trusts shield assets and provide control over distribution. 
• Charitable Giving – Align your goals with philanthropic endeavors. 

Flexibility and Adaptability 

Life evolves and so should your goals. Regularly review and adjust your estate plan based on changing circumstances: 

• Major Life Events – Marriage, birth, divorce, or business success may alter your priorities. 
• Legal and Tax Changes – Stay informed about laws affecting estate planning. 

Lifestyle Needs First 

Before optimizing your estate plan, consider your lifestyle needs and goals. Prudent wealth planning ensures that your essential expenses, such as housing, healthcare, and daily living, are adequately covered. No amount of tax planning should compromise your quality of life. Knowing your plan helps in determining the excess capital and the ability to sleep better at night with confidence around your plan. What do you need to consider beyond the essential needs?   

Excess Capital Assessment 

Once lifestyle needs are met, evaluate your excess capital. This surplus wealth can be strategically allocated for wealth transfer, philanthropy, or legacy planning. Consider: 

• Gifting Strategies – Annual gifting to family members or charitable organizations. 
• Irrevocable Trusts – Establishing trusts to protect assets and minimize estate taxes. 
• Family Limited Partnerships – Combining family assets for efficient management and tax benefits. 

Considerations 

• Stay Informed – Regularly monitor potential tax-law changes and understand how they may impact your financial future. 
• Holistic Approach – Your financial planning decisions should align with your overall goals. Consider your entire financial strategy, including investment, retirement, and estate planning. 
• Maximize Exclusions – Take advantage of annual and lifetime exclusions while minimizing transfer taxes. The window of opportunity today makes planning for the next few years crucial. 

As the tax landscape evolves, staying informed and adaptable is key. By integrating valuation techniques, understanding asset discounts, prioritizing lifestyle needs, and assessing excess capital, you can navigate the changing tax environment with confidence. Remember, financial wealth planning isn’t just about numbers, it’s about aligning your financial decisions with your life goals.  

The 2025 tax sunset presents challenges but also opportunities for proactive planners. Consult with a qualified financial advisor to tailor these strategies to your specific situation.